US embassy cable - 05CAIRO4836

UNCLAS CAIRO 004836 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
E.O.  12958: N/A 
TAGS: ECON, EFIN, ETRD, EINV, EG 
SUBJECT: EGYPT: MONETARY POLICY ON TRACK 
 
REF:  Cairo 2957 
 
1.  (U) In early June, the Central Bank of Egypt (CBE) 
published the minutes of the first meeting of the Monetary 
Policy Coordinating Council on April 10 (reftel).  According 
to Banking Law 88 of 2003, the CBE must implement a monetary 
policy that targets price stability as its main objective, 
implementing the policy in coordination with other GOE 
entities.  The minutes of the April 10 meeting indicate that 
the CBE plans to achieve low inflation rates in the medium 
term by managing, in the transitional period, short-term 
interest rates and other factors influencing inflation, 
while also monitoring credit and money supply developments. 
To accomplish this, the CBE set the overnight deposit rate 
and the overnight lending rate at 9.5 and 12.5% 
respectively, reducing overnight interest rates from their 
current level (Note:  The overnight rate dropped from 10.69% 
on June 1 to 9.77% on June 14.  End note).  The minutes of 
the meeting indicate that the CBE believes "real negative 
interest rates are inconsistent with ongoing efforts to 
reduce inflation rates". 
 
2.  (U) In the press release that accompanied publication of 
the minutes, the CBE stated that Egypt's economic recovery 
was continuing and real output growth was gradually 
approaching its target rate, which was projected at 5% for 
fiscal year 2005/2006.  According to the CBE, inflation has 
dropped in the first quarter of 2005 due to the CBE's tight 
monetary policy supported by a stable foreign exchange 
market.  The CBE announced it "intends to put in place a 
complete inflation targeting framework once the 
prerequisites are met". 
 
3.  (U) In December 2003 the CBE announced that it would 
pursue an inflation-targeting policy and began preparations 
for its implementation.  Following the appointment of a new 
CBE Governor in December 2004, preparations continued to 
pave the way for the inflation-targeting policy framework. 
Preparations included the launching of an interbank foreign 
exchange market and aggressive open market operations by the 
CBE to manage liquidity in the banking sector, strengthened 
by activation of the primary dealers system for government 
securities in July 2004.  Members of the Monetary Policy 
Coordinating Council were named in January 2005 and the 
Council is scheduled to meet on the first Thursday of each 
month.