How to cushion the blow of global economic turmoil will be the main challenge facing governments and monetary authorities worldwide. The global spillovers emanating from the US monetary policy will be a major challenge this year, not to mention the supply chain squeeze and the Russia-Ukraine conflict.
Following the Federal Reserve’s 25-basis-point rate hike, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) raised overnight interest rates by one per cent last week, citing its objective to anchor inflation expectations and contain second-round effects of supply shocks.
In its previous meeting on February 3, the MPC left the rates on hold for the 10th time in a row. The overnight deposit, lending, and the main operation rates currently stand at 9.25, 10.25, and 9.75 per cent respectively, according to CBE data.
Moreover, the CBE devalued the pound versus the US dollar and other foreign exchange currencies, stressing the importance of the exchange rate flexibility for safeguarding the nation’s macroeconomic stability. The greenback strengthened to LE18.5, up from LE15.75.
The MPC said the future policy rates would remain a function of inflation expectations, rather than prevailing inflation rates, keeping its inflation targetunchanged at 7 percent (±2 percentage points) on average in the fourth quarter of 2022.
What happened?
The Federal Open Market Committee (FOMC) raised interest rates by 0.25 per cent on March 16. It said it might increase rates six more times in 2022, citing growing economy and higher employment rate. The central banks in Saudi Arabia, United Arab Emirates, Kuwait and Bahrain, where the local currencies are dollar-pegged, also raised rates by 0.25 per cent.
Globally, many central banks have also raised rates following the Fed’s move in a bid to invigorate their local currencies versus the greenback and absorb any imported inflationary pressures resulting from rising world prices of energy and food commodities.
Here it should be understood that the ultimate objective of a well-designed monetary policy is to usher in – or maintain — financial stability. The monetary policy should strike a balance between combatting inflationary pressures and paving the way for investment inflows.
Outlook & determinants
A stabilized consumer price index (CPI) will play a key role in laying out the nation’s monetary policy and economic reforms as a whole in the coming months. Urban inflation rose to 8.8 per cent in February, up from 7.3 per cent a month earlier, data from the state-run Central Agency for Public Mobilisation and Statistics (CAPMAS) showed.
The core inflation rate rose to 7.2 per cent in February, up from 6.3 per cent a month earlier, CBE data showed. The core inflation rate, which is computed by the central bank, takes out fruit, vegetables and energy from the consumer price index (CPI) components to reveal a stable reading of price levels.
The central bank bases its monetary policy on core inflation rates. The hard equation will be ow to ward off inflationary pressures while simultaneously boosting direct investment via reasonable credit costs.
The policymakers will also keep an eye on costs of government borrowing from banks as well as issuances of sovereign debt on the local market. Further Fed’s rate hikes may drive the MPC to increase the rates by 1-2 per cent in the second half of 2022.
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