Egyptian Central Bank Governor Tarek Amer said inflation in the most populous Arab country has peaked after policy makers responded to the surge in prices by raising borrowing costs to the highest level in more than a decade.
“We are in the right direction and we are moving very fast,” Amer said in an interview with Bloomberg TV in Dubai on Monday. “We’ve been aggressive in our monetary policy, and this has been resisted a bit. But we thought it’s important so we can get our shop fixed very quickly.”
Egypt in November became the first Arab country to liberalize the exchange rate as part of a sweeping program to restore investor confidence in an economy battered by years of unrest. The government also reduced fuel and electricity subsidies, steps that past administrations had balked at to avoid stoking social unrest. The plan helped secure a $12 billion IMF program in November and encouraged investors to pour about $16 billion into local-currency debt, attracted by one of the world’s highest yields.
Inflation has also surged to more than 30 percent, the highest level in decades. In response, the central bank has raised interest rates 700 basis points, or 7 percentage points to 18.75 percent for the benchmark overnight deposit rate.
The Monetary Policy Committee said in July that it sees a “measured easing of the monetary policy stance to allow for a reduction in interest rates” as soon as “underlying inflation” starts to moderate.
The following month, the pace of price increases slowed to 1.1 percent from 3.2 percent in July. Monthly core inflation, which excludes volatile items and regulated products, eased to 0.3 percent, the lowest level in a year.
“I am getting more comfortable, much more comfortable,” the governor said.
Amer, a former Citigroup Inc. banker and head of Egypt’s largest state-owned lender, was named governor at the end of 2015. He inherited an economy struggling with a dollar shortage that had squeezed business and led to the emergence of a black market for foreign currencies.
Speaking 10 months after the unprecedented decision to float the pound, he said the economy was responding “very, very nicely” to the reform measures. Gross domestic product accelerated to 4.9 percent in the fourth quarter of the fiscal year that ended June 30, from 4.3 percent in the previous three months.
“Our GDP now has become now export-driven,” Amer said.
The central bank is targeting an inflation rate of 13 percent, plus or minus 3 percentage points, in the last quarter of 2018. It then wants to bring the rate down to 7 percent in the medium term, Amer said.
Ahmed Shams, head of research at investment bank EFG-Hermes, said he expects the central bank to slash borrowing costs between 3 to 4 percentage points over the next 12 months. “We are positive that monetary policy makers will start to normalize rates soon,” he said.
The governor said he doesn’t expect any major shocks to the economy or to prices over the next year. “We’re done in terms of the reforms. The tough decisions are done.” The IMF’s second program review, scheduled for the end of October, will be a “regular” one, he said.
“We are out of the ditch,” he said. “It has been very difficult. It was not easy at all.”