• What is the CBE's Monetary Policy Objective?
• What is the CBE doing in the transition until a full-fledged inflation targeting regime is formally adopted?
• What is the Interest Rate Corridor?
• What are the merits of the Corridor?
• Who decides on the Corridor?
• What is the Monetary Policy Committee (MPC)?
• How often does the MPC meet?
• How does the MPC decide on the interest rate?
• Does the MPC justify its policy actions?
• What is meant by the consumer price index (CPI)?
• What is meant by headline CPI inflation?
• What is meant by core CPI inflation? And how is it different from the headline CPI inflation?
• Does the core inflation measure replace the headline measure?
• Why use core inflation measure?
• Why publish core inflation measure?
• What are the methods of computing core inflation?
• How does the CBE calculate core inflation?
• What specific items are excluded from the headline index to compute the CBE's core inflation?
• How do other central banks construct their measures of core inflation based on the exclusion method?

What is the CBE's Monetary Policy Objective?
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 inter-bank 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 inter-bank 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 at "Monetary policy>Monetary Policy Decisions>MPC Press Releases"

What is meant by the consumer price index (CPI)?
It is a price index, published by the Central Agency for Public Mobilization and Statistics (CAPMAS) every month on www.capmas.gov.eg, capturing weighted price movements of consumer goods and services which constitute a representative "consumption basket" purchased by households. The weights in the basket reflect the relative importance of the goods and services in the household consumption basket based on the Household Expenditure Survey, which is carried out by CAPMAS every five years. This index is commonly referred to as the headline CPI.

 What is meant by headline CPI inflation?
It is a general increase in the price level of consumer goods and services contained in the household consumption basket over time. While the annual inflation rate captures the inflation story over the whole year, the monthly inflation rate contains the most recent developments.

 What is meant by core CPI inflation? And how is it different from the headline CPI inflation?
Core CPI is a variant of the headline CPI that excludes the impact of temporary price shocks on inflation that could result for various reasons, including weather conditions, supply disruptions or infrequent resetting of prices by the government.

 Does the core inflation measure replace the headline measure?
No, the core measure is derived from the headline and is used as a complementary indictor, mainly to distinguish the underlying trend of the inflation rate from its transitory movements. Therefore, core inflation should not, in any way, be regarded as a substitute for the headline inflation.

 Why use core inflation measure?
Temporary and sudden movements in the prices of some CPI components cause the headline inflation rate to experience sharp fluctuations. The volatility caused by temporary price shocks can make it difficult for policymakers to accurately distinguish between price changes that are likely to be persistent which, in turn, have implications for future inflation trends, and those which are temporary. In other words, the core measure provides a mean by which the monetary authority can separate the ‘noise’ and short-run fluctuations in the incoming data from the more persistent trend which provides ‘signals’ about current and future inflation.

 Why publish core inflation measure?
By timely communicating the core inflation measure, the CBE aims to improve the public's understanding of the inflation dynamics. This is expected to reduce the pass-through of temporary price shocks to inflation expectations and, in turn, minimize the variability in inflation.

 What are the methods of computing core inflation?
Most estimates of core inflation rely on some sort of transformation of the actual price data. Broadly speaking, there are two common ways of obtaining a measure of core inflation. One approach, the exclusion method, excludes nominated items from the CPI basket which display perverse behavior or are prone to exceptional or non-representative price movements. An alternative approach, the statistical method, is to exclude all extreme individual price movements on a monthly basis regardless of the source.

 How does the CBE calculate core inflation?
Similar to many other central banks (see last question), the published core inflation measure is based on the exclusion method because it is straight-forward, easy to understand by analysts and the general public and could be easily replicated outside the central bank.
Core inflation measures based on the exclusion method remove the direct effect of price movements in those items that tend to exhibit undue volatility and are often not reflective of the underlying or persistent inflation pressures in the economy. The second-round effects, however, that these items' price movements have on the other components within the CPI basket are part of the underlying inflation pressures in the economy and hence are not excluded. Therefore, excluding one-off price changes provides a better picture of existing underlying inflation pressures.

 What specific items are excluded from the headline index to compute the CBE's core inflation?
The items excluded from the core measure are:

1. Items with prices that are regulated by the government. While there is no official list of regulated items within the CPI basket, a thorough study carried out by the Monetary Policy Department at the CBE of historical developments in CPI components, shows that 19.4 percent of the CPI basket is regulated.  

2. Food items with prices which are inherently volatile since their supply largely depends on weather and harvest conditions, namely fruits and vegetables. They represent 8.8 percent of the CPI basket. 

 How do other central banks construct their measures of core inflation based on the exclusion method?

Most central banks, particularly those that adopt inflation targeting as a monetary policy regime, construct their own core inflation measures to monitor underlying inflationary pressures. See the table below.