The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) decided to keep its corridor interest rates unchanged at 9.75% for the overnight lending facility rate and at 8.25% for the overn...

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) decided to keep its corridor interest rates unchanged at 9.75% for the overnight lending facility rate and at 8.25% for the overnight deposit rate.   The MPC had cut interest rates six times this year, since February 2009, before pausing on November 5th as food inflation rose following August 2009. Annual headline inflation had declined from a peak of 23.7% in August 2008, to 9.0% in August 2009, before rebounding to 13.3% in October 2009, mainly due to base effects. Inflation remained at that level in November 2009, as changes in annual food inflation stabilized.   The monthly change in headline inflation was negative in November 2009, for the first time since December 2008. We had expected the MPC’s decision, given the relative stability in core inflation at the CBE’s comfort zone, according to CBE statements, the signs of real growth recovering gradually, rising from 4.1% in Q2-08/09 to 4.9% in Q1-09/10, and due to the absence of signs of the reemergence of significant non-food inflation. The MPC had cited these same reasons for its decision. The MPC indicated “there are encouraging signs that the outlook for the international economy appears to have improved as well. This, coupled with the domestic fiscal and monetary measures undertaken so far, will continue to provide a conducive environment for the domestic economy”.   The MPC indicated in its statement, however, that “It is important to underscore that the December inflation outturn is expected to reflect unfavorable base effects from last year, which has already been factored into the CBE’s assessment of the monetary policy stance”. We had expected inflation could rise to around 15% by January 2010, due to base effects, before declining to around 10%, on average, in the remainder of 2010. We believe the MPC’s statement confirms our expectation and that the annual headline inflation figures for December, and possibly January will be higher than the November figure of 13.3%. We expect that as non-food inflationary pressures emerge in 2010, driven by the higher economic growth, the CBE could tighten monetary policy in 2010. The possible cut in energy subsidies in Q2-2010 could lead the CBE to tighten monetary policy then to curb the second round inflationary pressures.