Egypt's central bank raised its key policy rates by 200 basis points to 16.75 percent, surprising financial markets and investors, and said it "will not hesitate to adjust its stance to offset anticipated upside or downside deviations from the inflation target."
The Central Bank of Egypt (CBE) has now raised its benchmark overnight deposit rate by 800 basis points since embarking an a tightening cycle in December 2015 and by 200 basis points this year.
In November 2016 the CBE also took financial markets by surprise by hiking its key rates by 300 basis points as part of a liberalization of foreign exchange markets.
After Egypt's pound was allowed to float, it immediately lost more than half its value, boosting import prices and thus inflation, but since March it has stabilized just over 18 to the U.S. dollar
The CBE said previous rate hikes and lower liquidity had helped contain inflation but the balance of risks were now tilted more strongly to the upside due to growing demand-side pressure.
Although Egypt's headline inflation rate rose further to 31.5 percent in April from 30.9 percent in March, on a monthly basis inflation had eased for the third consecutive month and core inflation, which excludes volatile food items, had risen only slightly after decelerating in February and March.
But Egypt's economy is showing growing signs of improvement and the central bank is concerned that high inflation, along with improving demand, will boost inflation expectations.
"Against this background, the MPC judges that hiking the CBE's key policy rates is consistent with the targeted disinflation path, and reiterates that the objective of its tighter stance is not to offset effects of supply-shocks, rather to contain underlying inflation excluding supply shocks that is affected by inflation expectations and the build-up of demand-side pressures," CBE said.
Egypt's economy grew by an annual rate of 3.9 percent in the third quarter of the 2016/17 year, up from 3.8 percent and 3.4 percent, respectively, in the two preceding quarters, CBE said.
In addition, the unemployment rate eased to 12.0 percent in the third quarter from 12.4 percent and 12.6 percent in the previous two quarters.
To help anchor inflation expectations, the central bank said it would begin to publish a targeted disinflation path in its regular policy statements and quarterly monetary policy reports as part of its flexible monetary targeting framework.
"In accommodation of first-round effects of supply-shocks, the elevated annual headline inflation rate will be temporarily tolerated before it is targeted to decline to 13% (+/- 3%) by 2018 Q4 and to single digits thereafter," the central bank said.
In addition to raising its overnight deposit rate by 200 basis points, the central bank also raised its other key rates by the same amount, putting the overnight lending rate at 17.75 percent, the rate on its main operation at 17.25 percent and its discount rate at 17.25 percent.
