In line with expectations, the Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) decided at its May 6th meeting to keep the overnight deposit rate and overnight lending rate unchanged at 8.25% and 9.75%, respectively. The discount rate was also kept unchanged at 8.5%. The MPC’s statement indicated that “Annual headline CPI declined to 12.2% in March compared to 12.78% registered in February 2010, yet remains elevated reflecting the impact of last year's unfavourable shock related to fruits and vegetables… annual core CPI inched up to 7.04% in March from 6.90% in February and remains within the CBE's comfort zone.
Annual real GDP growth recorded 5% in 2QFY2009/2010 compared to the four year low of 4.1% witnessed in 2QFY2008/2009, reflecting a steady improvement in economic activity. Furthermore, the ongoing recovery in the global economy coupled with the domestic fiscal and monetary measures undertaken so far will continue to provide a conducive environment for the domestic economy.”
The MPC assessed that “inflationary pressures remain subdued and that the current level of policy interest rate is appropriate and supportive of the economic recovery while consistent with maintaining core inflation within the CBE's comfort zone in the medium-term.”
Comment: We had expected the MPC would not be inclined to change the corridor interest rates, due to factors including: i) Annual headline inflation has been declining gradually, from 13.6% in January 2010 to 12.2% in March 2010.
We expect this trend to continue, albeit very slowly and with some fluctuation in the months to come to reflect one-off and seasonal changes mainly affecting food inflation,
ii) The increments in the monthly change in headline inflation, which we have observed over recent months, have been mainly the result of one-off factors related to the effects of changes in prices of energy and food products,
iii) Annual core inflation has averaged 7% since the beginning of the year, with the minor increments in the annual rate being precipitated by changes in prices of some food items still included in the core index,
iv) Economic growth has been picking up gradually, reaching 5.1% in 2QFY2009/2010, as has growth in credit to the private and household sectors, and finally,
v) The CBE has indicated previously that it will not be inclined to react to changes in inflation that are related to changes in food prices or factors affecting inflation temporarily, focusing more on changes in core inflation, with a comfort zone of 6 - 8% for the annual core inflation figure.
While we expect annual average inflation to rise to 13% in 2010, from the previously expected 11%, due to the effect of the one-off and seasonal factors we had discussed in previous reports, we do not expect non-food inflation to emerge before late 2010, depending on the effect of the change in metals pricing and its effect on production costs, and possibly a change in the prices of diesel and gasoline, which would have a bigger effect on inflation in the economy.
We, therefore, do not expect a change in CBE interest rates prior to the emergence of evidence of non-food inflation and a significant change in core inflation.