What is Monetary Policy

Law No. 88 of 2003 of the "Central Bank, Banking Sector and Monetary System" entrusts the Central Bank of Egypt (CBE) with the formulation and implementation of monetary policy, with price stability being the primary and overriding objective. The CBE is committed to achieving, over the medium term, low rates of inflation which it believes are essential for maintaining confidence and for sustaining high rates of investment and economic growth. The Government’s commitment to fiscal discipline is important to achieve this objective.

What is the CBE doing in the transition until a full-fledged inflation targeting regime is formally adopted?
The CBE intends to adopt a full-fledged inflation targeting regime once the fundamental prerequisites are met. Towards that end, the CBE has achieved the following:

• Moving from a quantitative operational target (excess reserves) to a price target (overnight inter-bank rate), and launching a Corridor system in June 2005.

• Issuing CBE instruments for the first time in August 2005 as the primary instruments for liquidity management through open market operations.

• Enhancing the role of monetary policy operations to absorb or inject liquidity in the market through a publicly announced auction schedule.

• Using a small open economy gap model with forward looking expectations and endogenous monetary policy response. The model's equations have clear micro-based motivation, derived from first order principles of rational agents.

• Devising the core inflation measure.

In the transition period, the CBE meets its inflation objectives by steering short term interest rates, keeping in view the developments in credit and money supply, as well as a host of other factors which may influence the underlying rate of inflation.

What is the Interest Rate Corridor?

On June 2, 2005 the CBE introduced an interest rate corridor, two standing facilities, the overnight lending and the overnight deposit facility. The interest rates on the two standing facilities, the overnight lending and the overnight deposit rates, define the ceiling and floor of the corridor, respectively. By setting the rates on the standing facilities, the MPC determines the corridor within which the overnight rate can fluctuate. Effectively, steering the overnight interbank rate within this corridor is the operational target of the CBE.

What are the merits of the Corridor?

Since the corridor was introduced in June 2005, volatility in the overnight interbank rate declined significantly.

Who decides on the Corridor?

The Monetary Policy Committee (MPC) decides on the corridor rates.

What is the Monetary Policy Committee (MPC)?

Monetary policy decisions are taken by the CBE’s Monetary Policy Committee (MPC), which consists of nine members comprising of the Governor of the CBE, the two Deputy Governors, and six members of the Board of Directors.

How often does the MPC meet?

The MPC convenes on Thursday every six weeks. The annual schedule of the MPC meetings is posted on the CBE’s web-page at "Monetary Policy>Monetary Policy Decisions>MPC Meeting Schedule"

How does the MPC decide on the interest rate?

The Monetary Policy Department prepares briefing material for the MPC ahead of each meeting. This material is analytical in content and focuses on both domestic and international developments. On the domestic front, the following variables are monitored: inflation, interest rates, monetary and credit developments, asset prices, and the real sector variables. Moreover, inflation forecasts based on the CBE's forecasting models are presented every quarter. On the external side, several variables are examined closely, including global growth, global interest rates, international commodity prices, global inflation, in addition to many other variables.

Does the MPC justify its policy actions?

Yes, the CBE publishes a press release after each MPC. It is accessible on "Monetary Policy>Monetary Policy Decisions>MPC Releases"