Central Bank of Egypt (CBE) tightened monetary policy during the last Monetary Policy Committee (MPC) meeting of 2015 by raising the overnight deposit rate, overnight lending rate and the rate of central bank’s main operation by 50bp to 9.25%, 10.25% and 9.75%, respectively, the central bank said in a statement. The MPC also raised the discount rate to 9.75%. The MPC’s decision followed the US Federal Reserve’s raising of federal funds rate by 0.25% and a subsequent rate hikes by regional Middle Eastern central banks.

The MPC reasoned that the slow building-up of inflationary pressures evident in increased non-food prices could push up inflationary expectations necessitating a rate hike. Annual headline CPI jumped to 11.08% in November from 9.7% in October partly on the back of unfavorable base effect from last year, while core inflation increased to 7.44% in November from 6.26% in October.

The committee further reinforced its decision by the robust GDP growth of 4.2% demonstrated in FY2014/2015 up from 2.2% in FY2013/2014 propelled by manufacturing, construction, real estate and tourism sectors as well as by investment in domestic mega projects. 

The MPC’s statement posted on the central bank’s website on December 24 for the first time incorporated language reflecting the extent of intervention by the government and the presidency through the reinvigorated Coordinating Council into monetary policy setting. The statement read “The government and CBE have decided to collaborate on designing a macroeconomic framework aimed at achieving macroeconomic stability… the key elements of the framework include but not limited to:

• Narrowing the country’s fiscal deficit to sustainable levels in order to alleviate the pressure on domestic liquidity, avail greater resources to the private sector to increase production, and hence reduce the consequent inflationary pressures from money creation
• Maintain price stability by avoiding double-digit inflation rates over the medium-term.
• Reducing the country’s trade deficit by initiating a strategy aimed at encouraging local production to meet domestic market needs and enhance imports substitutions.
• Stepping up the structural economic reform agenda to raise the economy’s potential output, by addressing the impediments that challenge increasing investments.

In an unprecedented move, the MPC postponed its scheduled rate setting meeting to December 24 from December 17 to give a chance to Coordinating Council members to meet on December 17.  The Coordinating Council is composed of central bank representatives, government ministers, a representative of the economic branch of the presidency and a couple of financial experts.