Statement by the Central Bank of Egypt
Following is a statement from the Central Bank of Egypt (CBE) in response to the
research published by Morgan Stanley on March 28, 2007 on monetary policy
decision making in Egypt.
The statement has critiqued the heading of the Prime Minister of the Coordinating
Council for Monetary Policy (CCMP), claiming that under such a setting tightening
monetary policy becomes virtually impossible.
The CBE categorically refuses to accept such a statement and announces that it is
totally misleading and factually incorrect. The CBE would like to stress that monetary
policy decisions are confidential and discretionary and the sole responsibility of the
Monetary Policy Committee (MPC) within the CBE in accordance with Banking Law
number 88 of 2003. The Prime Minister and the Government are not involved in
deciding on monetary policy. In addition, Banking Law 88 of 2003 asserts the
independence of the CBE and its Board, who are appointed directly by the President
of the country.
The CCMP is a platform to discuss general policies and for the Governor to build a
case for the “implicit inflation target”. This target will become explicit once the CBE
officially adopts inflation targeting. The CBE has full operational independence to
achieve the inflation target.
The CCMP is an independent body headed by the Prime Minister and formed of 12
members; 6 of whom are independent from the private sector and international
organizations; 3 from the CBE and 3 Ministers from the Government.
The decisions of the MPC are not known to the government and the market except on
the following business day through the officially transmitted press release (MPC
Furthermore, the CBE is currently building its inflation targeting framework in
coordination with the International Monetary Fund (IMF) which judges that the
official launch could be within the near future. The IMF regularly reviews the work
progress (the last time was in November 2006).
In connection to the claim that the macroeconomic policy mix in Egypt is too loose,
the CBE totally disagrees with such a statement as it is inconsistent with recent
developments. Such a statement needs to be put in context and benchmarked against
the evolving inflation dynamics and the economy’s growth prospects.
Current inflation levels as communicated by the MPC are predominantly driven by
supply shocks, chiefly administrative price adjustments and the avian flu. In addition,
the CBE will publish its core inflation indices within the next two weeks which will
shed light on the underlying inflation pressures in the economy.
The MPC judges that inflation will drop by mid-year as the carrying effects of the
earlier administrative price adjustments and the effects of the avian flu dissipate.
To contain heightened inflation expectations and combat the second round effects
from the fuel price hike, the monetary policy stance was tightened through two
consecutive interest rate hikes in November 2006 and December 2006, by 50 bps and
25 bps respectively. In addition, the MPC statement states clearly that it is closely
watching the underlying inflation and will not hesitate to adjust interest rates, as has
happened over the past six months.
We would like to close by quoting the IMF press release, published after the last staff
visit in November 2006, about monetary conditions in Egypt:
“Bold and wide-ranging reforms, supportive macroeconomic policies, and a
favorable external environment have contributed to macroeconomic stability and
higher growth and employment. While the external sector remains an important
engine of growth, the economic expansion has become more broad-based. The
balance of payments has been bolstered by capital inflows. Foreign debt and
external vulnerabilities remain low”.
“The key macroeconomic challenge is the recent pick up in inflation. The rising
inflation since April 2006 is partly attributed to a host of supply factors, notably
the impact of the Avian flu and adjustments in administered prices, particularly
fuel prices in July. Apart from supply factors, the higher inflation also reflects
demand pressures arising from robust economic activity. The mission shares
the authorities’ assessment that some of the factors driving inflation are
transitory and will dissipate over time; others are more durable and
require a policy response. In this regard, the recent tightening of monetary
policy by the CBE has been timely and appropriate”.