Egypt's central bank kept its policy rates unchanged, as expected, and said the economy had developed largely as expected so its rates were consistent with achieving its inflation target of 13 percent, plus/minus 3 percentage points, by the fourth quarter of 2018 and in single digits thereafter.
But the Central Bank of Egypt (CBE), which has raised its benchmark overnight deposit rate by 1,000 basis points to 18.75 percent since embarking on a tightening cycle in December 2015, added there were several risks surrounding this inflation outlook, most notably inflation expectations, demand-side pressures and the magnitude of any reform to government subsidies and their second-round effects.
"The materialization of such risks could lead to a stronger than projected loosening or tightening of the committee's stance to ensure that the inflation outlook is consistent with the targeted disinflation path," the CBE's monetary policy committee said.
Egypt's headline inflation rate accelerated further to 33.0 percent in July from 29.8 percent in June to the highest rate since June 1986 as regulated fuel prices were raised by up to 50 percent, electricity prices by up to 42 percent, and value-added-tax was raised to 14 percent as part of last year's $12 billion agreement with the International Monetary Fund (IMF) aimed at curbing the government budget deficit and reforming the economy.
Inflation also jumped in the wake of a float of Egypt's pound last November, with the CBE since then raising its policy rates by 700 basis points to contain second-round effects on inflation from government reform measures and the jolt to import prices from the plunge in the pound after the float.
Despite soaring inflation, Egypt's economy is slowly improving with annual Gross Domestic Product in the second quarter of this year up by 4.9 percent, up from 4.3 percent, 3.8 percent and 3.4 percent in the preceding quarters, the CBE estimated.
Based on data up to March, the central bank said the structure of economic growth has shifted to net exports and investments rather than consumption, with tourism, natural gas, trade, construction and non-petroleum manufacturing driving economic growth.
The far-ranging reform of Egypt's economy is being supported by the IMF, which in July released another $1.25 billion as part of the 3-year, $12 billion program.
"Egypt's reform program is off to a good start," the IMF said on July 13, adding the transition to a flexible exchange rate regime had gone smoothly and the parallel currency market had virtually disappeared and bank reserves had increased significantly.
The IMF also lauded the CBE's move to reduce inflation by raising its policy rates, absorbing excess liquidity and developing a clearly defined policy anchor to manage inflation expectations.
The government's efforts to curb its deficit by raising VAT and reforming energy subsidies is forecast to result in a primary surplus in 2017/18 for the first time in a decade, the IMF said, adding significant progress has also been made on structural reforms.
The IMF forecasts that Egypt's economy will grow 3.5 percent in the 2016/17 financial year, which ended June 30, and then by 4.5 percent in the current 2017/18 financial year.
Headline inflation is seen averaging 22.1 percent this fiscal year, falling to 10.3 percent by June 2018.
