WHILE reform in the banking sector seemed to be proceeding according to plan, improving the inflation- targeting mechanism was not as successful in 2006. While the trend throughout the year was to lower interest rates, the Monetary Policy Committee (MPC) meetings in November and December indicated that interest rates may be on the rise again in an attempt to contain inflation -- which hit 11.8 per cent in October. Inflation had stood at three per cent the previous year, but two weeks ago, and for a second time, the MPC raised overnight deposit rates and overnight lending rates a further 0.25 per cent. The rates rose to 8.75 per cent and 10.75 per cent, respectively. The move was described as "timely and appropriate" in a statement by a recent IMF mission to Egypt, issued in mid-December. According to an HC Securities Brokerage study, the reason behind the hike in inflation rates is "the continuing impact of shortages in some food items in the Consumer Price Index (CPI), affected by the outbreak of the Avian Flu in early 2006, energy subsidies reduction and utility subsidies reduction." This was augmented by the fact that higher growth rates and increased income, as a result of the tax cuts, helped strengthen local demand. While the rise in overnight deposit and lending rates was needed to slow down inflation, it also came in handy in boosting the interest rate differential between the Egyptian pound and the dollar. The move was also needed to give the interest rate differential between the Egyptian pound and the dollar a boost. Today, the interest rate differential stands at 350 basis points, which temporarily puts to rest fears of dollarisation which emerged when the US Federal Reserve Bank put a break on US interest rates at 5.25 per cent.
