The Evolution of Monetary Policy in Egypt and Steps towards Inflation Targeting

Abstract

Inflation targeting (IT) is one of the operational frameworks for monetary policy aimed at attaining price stability. In contrast to alternative strategies, notably money or exchange rate targeting, which seek to achieve low and stable inflation through targeting intermediate variables — for example, the growth rate of monetary aggregates or the level of the exchange rate against an ‘anchor’ currency — IT involves targeting inflation directly (IMF, 2005b). In a wider context, IT is part of a process in which economic policymaking is becoming more transparent and subject to greater accountability and technical rules, and less susceptible to discretionary actions. IT has become an increasingly popular monetary policy strategy. Since New Zealand adopted IT in 1989, twenty-nine countries have introduced IT frameworks (Roger 2010). Other countries are seeking to develop the necessary ‘infrastructure’ to implement an IT framework, Egypt being one. Moreover, according to Roger (2010: 52), TMF discussions with member states in 2006 suggested that the number of inflation targeters in developing and emerging market economies was likely to increase fourfold over the next decade, consistent with the estimate by Husain et al. (2005) that the number of countries with exchange rate pegs may almost halve in the next ten to fifteen years.’ Nonetheless, the 2008 global financial crisis and the preceding boom-and-bubble period pose serious challenges to IT and to the conduct of monetary policy (Schmidt-Hebbel, 2010).