Analysis by Ahmed Kamel
As forecast the Monetary Policy Committee (MPC) of the Central Bank of Egypt has left overnight interest rates unchanged. It kept the overnight deposit, lending and main operation rates at 19.25, 20.25 and 19.25 per cent respectively. It also kept the discount rate steady at 19.75 per cent.
The MPC said in a statement on CBE’s website that annual headline inflation continued its upward trend recording 38 per cent in September 2023 due to higher food inflation while non-food inflation softened.
“Accordingly, inflation dynamics for the past three months ending in September 2023 mainly reflect the effect of adverse weather conditions, which further amplified the seasonal increase in the prices of agricultural products,” the CBE said in a statement.
The CBE said annual core inflation declined for the third consecutive month to record 39.7 per cent in September 2023 down from 40.4 per cent in August 2023.The CBE relies on core inflation for laying out its monetary policy.
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.
“On the global front, forecasts for key international commodity prices, particularly energy, have been revised upwards compared to the forecasts underlying the previous meeting, mainly due to rising geopolitical tensions in the region. Nonetheless, inflationary pressures have eased worldwide as a result of monetary policy tightening cycles in major economies, as well as favorable base effects,” the CBE said in a statement.
“Incoming data since the September MPC, including the recent inflation outturns, came broadly in line with expectations. In light of the above, the MPC decided to keep policy rates unchanged and to continue assessing the cumulative impact of previously enacted tightening policies and its transmission to the economy in a data-driven manner,” it said.
Inflation targets remain the same
The MPC has made it clear that the path of future policy rates remains a function of forecasted inflation rather than prevailing inflation rates and will continue to judge the balance of risks surrounding the inflation outlook.
The MPC has kept its inflation targets of seven per cent (± 2 percentage points) on average by 2024 Q4 and five per cent (± 2 percentage points) on average by 2026 Q4.
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.
It is essential to coordinate Egypt’s fiscal and monetary policies to ensure sustained economic growth in the future. The state budget, taxation and government spending should be intertwined with the monetary orientation and the nation’s economic objectives as a whole.
The fiscal policy should soothe the monetary policy, when the latter relies on slashing demand by high interest rates to increase savings. In case of high rates and supply-driven inflationary pressures, lower tax rates would increase supply and output.