CAIRO: Egypt's central bank last week held corridor interest rates at the same level for the second consecutive time, at 9.75 percent lending and 8.25 percent deposit. After vigilant defense from economic stagnation caused six rate cuts since February, the Monetary Policy Committee's (MPC) last reduction came in September, which brought the benchmark rate to its lowest level since 2006. Seeing inflation fall to 9 percent in August, down from 23.7 percent in August 2008, the MPC finally held rates steady in early November, and at its most recent meeting on December 24, decided to maintain them. Although inflation rose in October to 13.3 percent, the monthly change in headline inflation was negative in November for the first time since December 2008. In addition, real growth rose from 4.1 percent in the second quarter of 2008/09 to 4.9 percent in this, the first quarter of 2009/10. The MPC said in a statement that, "there are encouraging signs that the outlook for the international economy appears to have improved.This, coupled with the domestic fiscal and monetary measures taken so far, will continue to provide a conducive environment for the domestic economy. However, the MPC warned, "It is important to underscore that the December inflation outturn is expected to reflect unfavorable base effects from last year, which has already been factored into the CBE's assessment of the monetary policy stance. Investment bank Beltone Financial stated in a note that, "We had expected inflation could rise to around 15 percent by January 2010, due to base effects, before declining to around 10 percent, on average, in the remainder of 2010. "We expect that as non-food inflationary pressures emerge in 2010, driven by the higher economic growth, the CBE could tighten monetary policy in 2010. The possible cut in energy subsidies in quarter two of 2010 could lead the CBE to tighten monetary policy to curb the second round inflationary pressures. Reporting on the meeting prior to hearing its outcome, Reuters quoted EFG-Hermes analyst Simon Kitchen on his expectations for rates to remain steady, Growth is still well below trend for 2005-2007. Inflation seems to be stabilizing and core inflation is within, we think, their comfort zone. Core inflation is currently up slightly from 6.5 percent in October to 6.6 percent in November, but does fall with the 6 to 8 percent zone that CBE considers acceptable. Analysis by HC Brokerage stated "an increase in the price of fruits and vegetables, excluded from the core CPI index for their volatility, as being the "main driver of the hike in inflation. They conclude that the headline and core inflation rates grow more disparate. Ola El-Khawaga, professor of economics at Cairo University, expressed ambivalence at the steady rate and expressed criticism of the process of calculation for the inflation rate: "In fact, the numbers they use cannot be considered entirely accurate. In my opinion, the manner of ascertaining the level of core inflation should be revised to reflect the pattern of consumption of the Egyptian household. Magdy Sobhy of the Al-Ahram Center for Political and Strategic Studies previously criticized the CBE for keeping rates too low. At the announcement of the recent decision, Sobhy maintained his opinion that with the inflation rate riding at over 5 percent more than the interest rate, investors will decide against depositing surplus cash in the banks. "With inflation rates high and the interest rate far below it, I think the banks will find people investing their money in another sector, he said. Yet he explained that the usual receptacle for excess cash, the housing sector, will face the first serious effort to implement a property tax. By early next year real estate will represent a less appealing alternative for investment, particularly as suspicions and mistrust about the new property tax simmer quietly. The tax, which will affect Egyptians possessing property worth more than LE 450,000, looks to affect only about 10 percent of the population, according to Tarek Farag, chairman of the Real Estate Tax Authority. Thus far, resistance to the tax has not been overly vocal. However, investors may quietly move their money away from the real estate market, once Egypt's prize cash cow. Questioned about where those with extra money will put it, Sobhy half-heartedly suggests the gold market. "Maybe gold will be the alternative, because the price is currently high, and some predict it will go higher, he added. However he considers this a waste, when the money could otherwise be tilled into economic development and increasing liquidity. He expressed frustration at the policy, but did acknowledge that, "A low interest rate encourages people to invest in the private sector. They need to keep government debt under control by paying less interest.
