Egypt’s central bank chief said higher interest rates can do little to contain inflation that he described as stoked mainly by supply issues.
(Bloomberg) — Egypt’s central bank chief said higher interest rates can do little to contain inflation that he described as stoked mainly by supply issues.
With the central bank raising interest rates by 1,000 basis points over the past year, “we’ll not hesitate to do more, but we need to be very careful,” Governor Hassan Abdalla said in rare public comments in Washington late on Thursday. “The interest rate is not the only tool.”
Speaking at an event during the World Bank and International Monetary Fund’s Spring Meetings, Abdalla used his appearance to map out an approach beyond monetary policy in tackling the fastest inflation Egypt has seen since the aftermath of a currency crisis in 2016.
Though external shocks to commodity prices and three currency devaluations have been a major contributor to driving up the cost of consumer products, Egypt also faces a squeeze on the supply of imported good and raw materials after restrictions last year.
“A lot of our inflation is imported and a lot of it is due to supply problems,” Abdalla said. “Not only supply prices but supply issues including a backlog that has resulted from some previous regulations. And this in itself is not and will not be addressed by interest rates.”
While Egypt’s central bank raised its key rate by 200 basis points last month, its policies have frustrated some investors during a foreign-exchange crunch that’s seen the local currency come under increasing pressure. Policymakers surprised many economists in February by leaving rates on hold.
Even with the latest hike, Egypt’s inflation-adjusted borrowing costs are one of the lowest among more than 50 major economies tracked by Bloomberg. A real interest rate that was once the world’s highest is still far below zero, deterring portfolio investors from returning to a country in need of external funding.
Abdalla first became acting central bank governor last August after the surprise resignation of his predecessor, long seen as a supporter of a stable currency. In October, authorities pledged to move to a more flexible exchange rate, enabling them to clinch a $3 billion deal with the International Monetary Fund.
The central bank targets inflation of 7%, plus or minus 2 percentage points, by the fourth quarter of next year. Consumer prices climbed an annual 32.7% in March, the fastest in almost six years.
“The central bank of Egypt does not and will not hesitate to use monetary policy in order to reach its target of inflation,” Abdalla said. “What has been done today is quite huge and we’re ready to do more. However, the whole issue has to be looked at, not only monetary policy.”
Abdalla also said:
- “Relaxing the supply issues and increased competition will result also in a healthier and faster inflation reduction”
- “We are working very hard on increasing transmission mechanisms and we are doing several things that would allow us to have more effective interest rates”
- “The market needs to see a true story and needs to see a way forward for some time, a plan for two three years. You cannot get back the confidence and the trust and managing expectations unless you have the whole full plan. And this is something I’m glad to tell you that we are working very closely with the government on”
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