Egypt May Need Tighter Monetary Policy to Tackle Inflation: IMF Regional Report

Central banks in the Middle East and Central Asia (MECA) region, including Egypt, may need to adopt tighter monetary policies in order to tackle surging inflation, according to the second chapter of the IMF Regional Economic Outlook May 2023 Report.

The IMF report said that some countries in the region are responding well to the pace of inflation, but others are lagging behind and need to implement stricter monetary policies.

"Egypt and Tunisia increased interest rates consistent with their historical norms and less than the emerging market and developing economy (EMDE) benchmark, suggesting that they are less reactive to inflation developments than other peers, likely because the trade-offs in these countries between higher interest rates and debt sustainability are critical," the report noted.

“However, inflation has continued to rise in Egypt, Pakistan, and Tunisia, with the comparison of current policy interest rates relative to natural policy rate estimates suggesting that further interest rate increases are needed to stabilize inflation,” the report added.

Exchange rate flexibility and the use of macroprudential policies, which aims to mitigate risk in the financial system, will make tight monetary policies more effective in fighting inflation, it stressed.

Earlier in April, the Governor of the Central Bank of Egypt (CBE) Hassan Abdallah said in statements to Ahram Online that Egypt has taken bold actions in monetary policies in recent years to deal with ongoing economic challenges, and will not hesitate to do more.

"The CBE's primary focus in the current period is curbing inflation.

We are targeting a 7 percent (±2 percent) inflation rate by the fourth quarter of 2026," Abdallah noted.

In March, the Monetary Policy Committee (MPC) at the CBE raised interest rates by two percent (200 bps) to rein in inflation.

In 2022, the MPC raised key interest rates by a total of eight percent (800 bps) to support the Egyptian pound and rein in inflation, which increased significantly following the outbreak of the Ukraine conflict.

Egypt's headline inflation has remained in double digits since the spring of 2022, jumping to a five-year-high of 33.9 percent in March of this year.

However, the core inflation rate fell below 40 percent in March, according to the latest figures released by the CBE.

Key recommendations The IMF concluded the second chapter of the regional economic outlook report with a set of recommendations, including advising the MECA countries to remain data-dependent and not to start loosening their monetary policy until there are clear signs that core inflation is on a downward trajectory.

The IMF suggests that countries with currency pegs should follow the US monetary policy and consider the use of additional macroprudential policies.

Meanwhile, the fund urged that countries with loose monetary policy stances and persistent inflationary pressures consider tighter monetary policies to stabilize inflation and inflation expectations.

The fund also called on MECA countries to improve their monetary policy frameworks and monetary policy transmission, highlighting that policymakers need to develop surveys of inflation expectations, which are not currently available in most countries in the region.