EGYPT: MONETARY POLICY ON TRACK

UNCLAS CAIRO 004836

SIPDIS

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: EGYPT: MONETARY POLICY ON TRACK

REF: Cairo 2957


1. (U) In early June, the Central Bank of Egypt (CBE)
published the minutes of the first meeting of the Monetary
Policy Coordinating Council on April 10 (reftel). According
to Banking Law 88 of 2003, the CBE must implement a monetary
policy that targets price stability as its main objective,
implementing the policy in coordination with other GOE
entities. The minutes of the April 10 meeting indicate that
the CBE plans to achieve low inflation rates in the medium
term by managing, in the transitional period, short-term
interest rates and other factors influencing inflation,
while also monitoring credit and money supply developments.
To accomplish this, the CBE set the overnight deposit rate
and the overnight lending rate at 9.5 and 12.5%
respectively, reducing overnight interest rates from their
current level (Note: The overnight rate dropped from 10.69%
on June 1 to 9.77% on June 14. End note). The minutes of
the meeting indicate that the CBE believes "real negative
interest rates are inconsistent with ongoing efforts to
reduce inflation rates".


2. (U) In the press release that accompanied publication of
the minutes, the CBE stated that Egypt's economic recovery
was continuing and real output growth was gradually
approaching its target rate, which was projected at 5% for
fiscal year 2005/2006. According to the CBE, inflation has
dropped in the first quarter of 2005 due to the CBE's tight
monetary policy supported by a stable foreign exchange
market. The CBE announced it "intends to put in place a
complete inflation targeting framework once the
prerequisites are met".


3. (U) In December 2003 the CBE announced that it would
pursue an inflation-targeting policy and began preparations
for its implementation. Following the appointment of a new
CBE Governor in December 2004, preparations continued to
pave the way for the inflation-targeting policy framework.
Preparations included the launching of an interbank foreign
exchange market and aggressive open market operations by the
CBE to manage liquidity in the banking sector, strengthened
by activation of the primary dealers system for government
securities in July 2004. Members of the Monetary Policy
Coordinating Council were named in January 2005 and the
Council is scheduled to meet on the first Thursday of each
month.