The major global central banks, led by the US Federal Reserve, the European Central Bank, and the Bank of England, kept their interest rates unchanged at the end of last week, as the markets await the decision of the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE), scheduled on Thursday.
Central Bank of Egypt
Next Thursday, the MPC of CBE will hold its last meeting in 2023 to discuss the future of the Bank’s basic interest rates, which are the main indicators of the direction of the pound’s interest rates in the short term.
The committee maintained those rates for the second consecutive time on November 2, 2023, at 19.25% for deposits, 20.25% for lending, and 19.75% for the credit and discount rates and the main operation of CBE.
Analysts expect the meeting to have no surprises this time as interest rates on deposits and lending are likely to remain unchanged, due to the ongoing slowdown in annual core inflation rates since September 2023, dropping by about 4.5%, to 35.9% in November, from 40% in August 2023.
After its meeting on 2 November, MPC stated that the future of key interest rates depends on expected inflation rates rather than current inflation rates.
MPC has affirmed that it will not hesitate to use all available monetary policy tools to maintain restrictive monetary conditions, to achieve target inflation rates of 7% (±2%) on average during the fourth quarter of 2024 and 5% (±2%) on average during the fourth quarter of 2026. It will also continue to assess the impact of the restrictive monetary policy that was adopted and its effect on the economy, based on the data received during the upcoming period.
Last week, CBE announced that the annual core inflation rate fell to 35.9% in November 2023, from 38.1% in October, while the core consumer price index recorded a monthly rate of 1.0% in November, down from 1.8% in October.
US Federal Reserve
The Federal Reserve, the US central bank, kept interest rates at levels between 5.25% and 5.5% for the third consecutive time last week. This was their highest level in 22 years. It continued to monitor the impact of the monetary tightening path that started in mid-2022.
The US Federal Reserve’s decision, in its final meeting for the year 2023, matched the expectations of investment banks and confirmed the vision of monetary policy officials to keep interest rates high for a longer period, especially as inflation rates stayed at higher levels than their target of 2%, supported by a strong labor market.
The inflation report for November showed that the core consumer price index increased by 0.3% every month, and 4% on an annual basis.
Federal Reserve Chairman Jerome Powell said that the expectations of members of the Federal Open Market Committee to lower interest rates next year were not a decision or plan made by the committee, but rather could be changed based on the development of economic and inflation data. He emphasized that the committee would proceed with caution based on the total data received for inflation and the economy.
The median Federal Open Market Committee forecast indicated interest rate cuts of 75 basis points in 2024 to 4.6%, down from the committee’s previous forecast in September of 5.1%.
The head of the Federal Reserve said that inflation decreased over the past year, without a rise in unemployment rates, but it was still high, reaffirming the US central bank’s determination to bring inflation back to its 2% target.
At the same time, Powell stressed that the Federal Open Market Committee was fully aware of the risks of high inflation on purchasing power, stressing that CBE was ready to further tighten monetary policy if the need arose to do more to bring inflation to its specified target.
Expectations issued by the Central Bank suggested that inflation would drop to 2.4% in 2024, and 2% in 2026.
Powell hinted that Federal Committee members started discussing the possibilities of lowering interest rates at the December meeting for the first time, noting that these possibilities had not been discussed in previous meetings.
European Central Bank
The European Central Bank kept interest rates at the same levels for the second meeting in a row, and monetary policy officials expected inflation to rise temporarily in the short term.
Monetary policymakers left the interest rate on deposits at 4%, which was consistent with market expectations. The bank also kept the interest rate on the main refinancing process and the interest rate on loans at 4.5% and 4.75%, respectively, without change, according to the MPC statement.
The European Central Bank expected inflation to gradually decline during 2024 before reaching its target of 2% in 2025.
Monetary policy officials at the European Central Bank reduced their expectations for the path of inflation during the current and next years from their predictions in September, suggesting that the average headline inflation would reach 5.4% in 2023 and 2.7% next year, reaching 2.1% in 2025 and 1.9%. In 2026.
The European Central Bank reiterated its intention to ensure that inflation returns to its medium-term target of 2% promptly.
Based on its current assessment, monetary policymakers believed that CBE’s key interest rates at certain levels would contribute significantly to achieving this goal if maintained long enough.
The ECB said core inflation fell further, but domestic price pressures remained high, mainly due to strong growth in business costs.
Monetary policy officials noted that the effects of previous interest rate increases are still strongly transmitted to the economy, and tighter financing conditions are discouraging demand, which helps reduce inflation.
The MPC stressed that its future decisions will ensure that interest rates are set at sufficiently restrictive levels for as long as necessary.
Bank of England
The Bank of England maintained interest rates at their highest levels in 15 years, and monetary policymakers stressed their message to keep interest rates high for a longer period, despite growing market expectations of a rate cut in 2024.
MPC voted by a majority of six to three members to hold the key interest rate at 5.25% for the third consecutive meeting, according to the minutes of the decision released last Thursday.
Monetary policymakers remained divided, as in their previous meeting in November, as three of them still favored raising interest rates.
The committee kept its guidance that interest rates should be “sufficiently tight for a sufficiently long time” to curb inflation, in sharp contrast to new signals from the Federal Reserve that US policymakers are ready to lower interest rates next year.
In the statement following the decision, Bank of England Governor Andrew Bailey said there was still a long way to go in the fight to control inflation.
MPC repeated its guidance that it might increase interest rates again if there is evidence of more lasting inflationary pressures, especially as price growth stays more than double the 2% target.
