Unexpectedly surge in interest rates by 200 basis points: Egypt CBE

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) announced raising interest rates by two percent or 200 basis points (bps).

The hike involved increasing overnight deposit interest rate to 18.75 percent, and overnight lending to 19.75 percent, according to a statement released late Thursday.

Similarly, the discount rate was hiked by 200 bps to 19.25 percent.

 In May, Egypt’s annual headline inflation fell for the first time since October 2016 to 29.7 percent from 31.5 percent in April.

 The CBE attributed the drop in inflation to “favourable base effect stemming from the exchange rate depreciation in March 2016 that strongly impacted prices in May 2016.”

 Similarly, annual core inflation, which continued to be supported by improved base effects since March 2017, declined to 30.6 percent in May from 33.1 percent in February.

Meanwhile, monthly headline inflation was stable at 1.7 percent in May 2017, while monthly core inflation rose to 2.0 percent last month, compared to 1.1 percent in April.

“The impact of the November 2016 economic reform measures on prices of goods and services has largely passed-through, with the lagged impact affecting prices of items that witnessed delayed or seasonal consumption such as pilgrimage services in May, which contributed by 0.6 percentage points and 0.9 percentage points to headline and core inflation, respectively,” the CBE stated.

 The MPC has decided that “tightening monetary conditions is warranted to achieve the inflation target of 13 percent” in the fourth quarter of 2018 and to record single digits afterwards, the statement showed.

 “The MPC reiterates that the objective of its tighter stance is not to offset first-round effects of supply-shocks, rather to contain second-round effects and ensure that the inflation outlook is consistent with achieving the targeted disinflation path,” the CBE highlighted.

 It added that as soon as underlying inflation begins to moderate, the MPC “envisages a measured easing of the monetary stance to allow for a reduction in interest rates.”

 On 30 March, the CBE decided to keep interest rates unchanged, from its previous hike in November 2016, when it raised rates by 3 percent to 14.75 percent and 15.75 percent, for overnight deposit and lending, respectively, to coincide with floating the Egyptian pound.