The Central Bank of Egypt (CBE) will unlikely face major challenges to achieve its inflation target, Mona Bedeir, senior macroeconomic analyst at Prime Holding, said.
The CBE has been trying since 2005 to adopt inflation targeting as its monetary policy, but it has not been able to meet the basic requirements for this framework.
“Historically, the rate of inflation in Egypt was largely driven by the growth of domestic liquidity, while the lack of a sound financial position due to the large budget deficit and the CBE commitment to stabilise the exchange rate as an implicit goal of its monetary policy, was one of the most important obstacles to inflation targeting,” Bedeir said.
But the improvement of financial indicators, the low budget deficit, and the diversity of the CBE’s sources of financing have all limited the pressure on the bank to finance the budget deficit.
“In general, the road is now more paved than ever for the CBE to follow inflation targeting,” she added.
President Abdel Fatah Al-Sisi has renewed in November the tenure of the CBE Governor Tarek Amer for more four years until November 2023.
During the first term of Amer in the CBE, the bank went through a very critical period in its history, following the historic decision to float the local currency, experiencing unprecedented levels of inflation.
Ironically, under Amer, the CBE has seen inflation reaches its highest level since 1986, but gradually the inflation declined, hitting its lowest level in 14 years, Bedeir said.
“So, it makes sense to say that these cloudy years of painful economic decisions and runaway inflation numbers have become a tremendous success for Amer and more importantly they paved the way for a new era of more credible and transparent monetary policy in the context of inflation targeting,” she added.
“We can say that the monetary policy in Egypt now allows more reduction of interest rates over the next two years, as the inflation is expected to remain within the target until the end of 2020.”
The pressures on the exchange rate are limited now, and the capital inflows are expected to remain strong, she noted.
Bedeir also expected that global monetary easing cycles would maintain their momentum, a characteristic in emerging countries, in addition to the absence of upward pressure on oil prices.