CAIRO: The Central Bank of Egypt (CBE) should resist further interest rate cuts until low inflation is the norm, despite a plunge in consumer prices since 2005, the International Monetary Fund said in a statement on Tuesday. IMF directors cautioned that any additional interest rate reductions should wait until liquidity growth decelerates further and low inflation becomes firmly entrenched and noted that financing of the government should be strictly limited. Egypt s overall consumer price index fell to 4.1 percent year-on-year in 2005 from 17 percent in 2004 and is forecast to reach 5.5 percent this year. The CBE introduced a corridor for the overnight interbank rate in May 2005 that has reduced the volatility of short-term rates, the IMF said. The executive board of the fund welcomed the central bank s plan to move to inflation targeting, said Klaus Enders, IMF mission chief for Egypt. The way the central bank transacts its transactions, however, has led to a certain stability of the exchange rate. I think when you move to inflation targeting greater exchange rate flexibility will be needed, Enders told reporters. Economic growth this year should match the 5.6 percent growth of 2005 but be more broad-based, with construction and services expanding at a healthy rate, the fund added. Egypt s current account surplus should narrow to 1.2 percent of gross domestic product this year compared with 2 percent in 2005, because non-oil imports are growing rapidly and non-oil exports are stagnating, it said. The balance of payments and external positions remain comfortable. International reserves have increased from $15 billion to $22.5 billion (seven and a half months of imports) over the 15 months through end-March 2006, the IMF said. Egypt s net foreign asset position at the central bank and in the banking system is being bolstered by capital inflows. The external debt-to-GDP ratio, currently at 30 percent of GDP, is projected to decline in the coming years, reflecting prudent external borrowing, the IMF said. Reuters
