By Ahmed Kamel Cairo, April 4, 2018 - The monetary policymakers are trying to boost the investment climate through easing credit and lowering interest rates. The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) started a gradual easing of monetary policy in February in view of declining inflation rates over the past months. The MPC last week cut the overnight deposit and lending rates by one per cent to 16.75 and 17.75 per cent respectively on Thursday, citing lower inflation rates. Eventually, the move will highly likely slash the cost of investment in Egypt. However, the monetary policymakers will watch a number of local and global factors in the coming months. On the domestic scene, the MPC will keep an eye on inflation rates ahead of the holy Muslim month of Ramadan, which is expected to begin by mid-May. The inflation rate may fall below 10 per cent by mid-May. Urban inflation stood at 14.4 per cent in February, down from 17.1 per cent a month earlier, data from the state-run Central Agency for Public Mobilisation and Statistics (CAPMAS) showed. The global factors include oil prices, world trade and the foreign exchange of the US currency. A potential trade war may lead to fluctuations of foreign exchange rates worldwide. US currency The greenback stabilised at around LE17.6 since February 15, market data showed. The CBE floated the Egyptian pound on November 3, 2016, to eradicate a foreign exchange black market that escalated demand for hard currency. The price of a certain currency is set by supply/demand mechanism. However, rate hikes by the US Federal Reserve will be a factor in pricing the greenback worldwide. In his testimony before the US Congress in February, Fed Chairman Jerome Powell unveiled a plan to "gradually increase" interest rates this year. Powell is expected to continue the monetary course set by his predecessor – Janet Yellen, who led balanced monetary policies. The Federal Reserve raised rates by 25 basis points, or 0.25 per cent, in March. "If inflation [in the US] does move up, the strength in activity will soon feel like "too much of a good thing" for some central banks, which need to slow growth to a trend rate to prevent a bigger overheating – and bigger recession risks down the road. So, our Fed call is considerably more hawkish than market pricing," Goldman Sachs said in a report, a copy of which was made available to the Egyptian Mail. The greenback may strengthen on the back of potential Fed rate hikes this year. "Emerging markets, however, could be more at risk from tighter Fed policy. More emerging economies keep their exchange rates at least partially fixed, which means that they have to import tighter money when the Fed hikes," the Goldman Sachs report forecast. "We maintain our slightly negative view on fixed income as we believe rates on the short and long ends should continue to grind higher in the coming months," Bank of America Merrill Lynch said in a report on interest rates in the US. Egypt's main challenge will be maintaining a stabilised foreign exchange rate to boost the business climate and attract more inflows of foreign direct investment (FDI). Prudent policy for growth The International Monetary Fund (IMF) has commended the CBE for maintaining a prudent monetary policy stance. A prudent policy, taking all factors into account, will escalate investment rates and bolster economic growth. The Sherif Ismail-led Cabinet targets a 5.8 per cent economic growth rate in the fiscal year 2018/19. Egypt's fiscal year begins on July 1. "The CBE will need to focus on seasonally-adjusted monthly inflation trends, and consider gradual monetary easing only if inflation expectations and key macro-economic indicators [gross domestic product (GDP) growth, the current account balance, credit, real interest rates, banking liquidity, real wage growth] consistently point to the absence of demand pressures and second-round effects," the IMF said in a report in January. "Egypt's economic outlook is favourable, provided prudent macro-economic policies are maintained and the scope of growth-enhancing reforms is broadened. GDP growth rebounded from 3.5 per cent in the 2015/16 fiscal year to 4.2 per cent in 2016/17, and it is projected to strengthen further to 4.8 per cent in 2017/18 and to six per cent in the medium term," the IMF report said.
