The Central Bank of Egypt (CBE) maintained basic interest rates unchanged last Thursday so that it can have the chance to assess the impact of the previous preemptive rate increases of total 8% during 2022, on inflation, according to the bank.
The Monetary Policy Committee (MPC) decided to fix the basic interest rates at 16.25% for deposit, 17.25% for lending, and 16.75% for the credit and discount rate and the price of the main operation at the CBE.
The committee said that global commodity price expectations indicate a slightly higher rise than expected in its previous meeting. It pointed out that the financial conditions of the US economy continued to improve, while the situation in the European Union stabilized.
The MPC noted that uncertainty regarding global commodity price expectations continued in the current time. Several factors contributed to this situation, of which the expected slowdown in global economic activity, the easing of precautionary measures related to the Coronavirus epidemic in China, and the Russian-Ukrainian crisis.
As for Egypt, the committee said that the economic activity recovered during the third quarter (3Q) of 2022, recording a real GDP growth of 4.4%, compared to 3.3% in 2Q of 2022, explaining that this recovery was driven by an improvement in economic activity in the tourism, agriculture, wholesale, and retail sectors.
In addition, most of the preliminary indicators continued to record positive growth rates, albeit at a slower pace, during the fourth quarter of 2022, and it is expected during the coming period that the GDP growth rate will follow a moderate pace during the fiscal year 2022/2023 compared to the previous fiscal year before it rose again afterwards.
With regard to the labour market, the committee indicated that the unemployment rate recorded 7.4% during the third quarter of 2022, compared to a rate of 7.2% during the previous quarter.
The committee indicated that the annual urban general inflation rate increased to 21.3% in December 2022, and the annual rate of core inflation continued to rise to 24.4% during the same month. The annual general inflation rate recorded an average of 18.7% during the fourth quarter of 2022, compared to the target. previously announced by the Central Bank of 7% (±2%) on average during the same period.
It explained that these developments come as a result of the impact of the Russian-Ukrainian conflict and the disruption of global supply and supply chains on both the rise in global prices of basic commodities, despite their recent decline, and fluctuations in the exchange rate of the Egyptian pound since March 2022, in addition to other inflationary pressures from the demand side.
The MPC indicated the persistence of inflationary pressures on the demand side, which was reflected in the development of real economic activity compared to its maximum production capacity and the impact of recent exchange rate fluctuations, pointing out that these developments are consistent with the rise in the domestic liquidity growth rate.
It explained that to counter inflationary pressures, it raised the basic interest rates at the CBE proactively by 800 basis points during 2022, including 500 basis points during the fourth quarter of the year. It also increased the percentage of cash reserves that banks are obligated to keep in CBE by 400 basis points in September 2022.
The committee believes tha the CBE’s proactive policy aims to control inflationary pressures and reduce inflation expectations to the target level of 7% (±2%) on average during 4Q of 2024.
It continued: “Since the future path of inflation rates depends on the cumulative increases in interest rates to date, which take time to affect inflation rates, we decided to keep the basic interest rates at CBE unchanged, in order to assess the impact of the proactive restriction policy according to the availability of economic data during the coming period.”
The committee indicated that the course of basic interest rates depends on expected inflation rates and not the prevailing inflation rates, stressing that restricting monetary conditions is a prerequisite for achieving targeted inflation rates and the goal of price stability in the medium term.
