Egypt Central Bank Sees Pound's Real Exchange Rate Appreciating

(Bloomberg) -- Egypt's improved competitiveness after the Nov. 3 floating of the currency is unlikely to be negatively affected by an expected appreciation of the pound's real effective exchange rate in the short term, the central bank said.

The expected gains in the pound's REER, which measures the currency's value compared to an average group of major currencies, will not "neutralize the substantial real depreciation" that took place in November and December, the regulator said in its first Monetary Policy Report issued Friday.

Egypt has been realizing the benefits of the flotation, including improvements in the country's balance of payments and the buildup of foreign reserves, while the inflationary pressures associated with the move "are subsiding," the regulator said.

The pound lost over half of its value relative to the U.S. dollar since the central bank removed exchange rate restrictions in a bid to ease a currency crunch that was crippling the economy. Consumer prices been surging ever since, with the annual inflation rate rising to over 30 percent in February-- even with the regulator's preemptive 300-basis-point interest rate increase in November.

The central bank did not provide an inflation forecast, but on March 30 the Finance Ministry said it expected the annual rate to average 15.2 percent in the fiscal year which starts July 1.

The regulator said it expects monthly inflation to "normalize," while the annual rate will "remain elevated." Given such a forecast, the bank said it kept the benchmark interest rate unchanged at 14.75 percent in its meeting on Thursday.

To contact the reporter on this story: Ahmed Feteha in Cairo at afeteha@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Hannah Benjamin, Tarek El-Tablawy