Egypt’s monetary policymakers are facing tough challenges with the exchange rate falling under rising pressures against a backdrop of the Russia-Ukraine conflict. A tightening monetary policy worldwide is rubbing salt into the wound casting a shadow on the country’s bill of imports. Demand for the US currency has significantly increased since February due to the higher cost of imports.
With the appointment of Hassan Abdullah as acting governor of the Central Bank of Egypt (CBE), a number of market challenges loom ahead, particularly as the Federal Reserve is determined to further increase interest rates this year.
A few hours after Abdullah’s appointment, the CBE’s Monetary Policy Committee left overnight rates unchanged last week. The overnight deposit and lending rates currently stand at 11.25 and 12.25 per cent respectively, according to CBE data.
Fresh policies
The appointment of Abdullah should usher in fresh monetary policies. The CBE is expected to turn over a new page in its monetary policy. All fingers are crossed that a fresh monetary policy will be Egypt’s magical wand, along with the fiscal orientation, to maintain macroeconomic stability in the medium and long terms.
A good monetary policy requires a well-established framework for risk containment. The financial risks include large disturbances to future macroeconomic conditions originating in financial variables.
The main goal of a well-balanced monetary is to tame inflation and drive a sustained economic growth. The monetary policy’s number one target is to combat inflationary pressures by scaling interest rates either up or down.
Central banks around the world usually scale rates up to tame inflation. However, such a classical Keynesian approach might not work out at times of stagflation. In 2016, the CBE raised rates following the currency float on November 3.
The inflation-targeted strategy has helped the CBE absorb the post-flotation inflation, which jumped above 23.5 per cent in the fiscal year 2016/17, according to data from the state-run Central Agency for Public Mobilisation and Statistics (CAPMAS).
The consumer price index (CPI) fell to 4.5 per cent in the fiscal year 2020/21, according to CAPMAS data. Egypt’s fiscal year begins on July 1.
Optimistic despite hardships
Optimism is a must when tacking the monetary policy. The CBE will take into account headwinds and opportunities. The glass is half empty, but it is still half-full.
While it is a must to curb inflation, it is imperative to boost the investment climate by offering attractive interest rates for the corporate sector. Therefore, the CBE will work out a prudent monetary policy stance.
The monetary policymakers will watch a number of local and global factors in the coming months. On the domestic scene, the MPC will keep an eye on inflation rates. They will also observe oil prices, world trade, and the foreign exchange of the US currency, which averaged LE19.15 last week.
The greenback may strengthen on the back of potential Fed rate hikes this year. A prudent policy, taking all factors into account, will escalate investment rates and bolster economic growth.
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