The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided last Thursday to maintain the overnight deposit and lending rates and CBE’s main operation at 27.25%, 28.25% and 27.75% respectively.
The committee also decided to maintain the credit and discount rate at 27.75%. This decision reflects the latest developments and expectations at the global and local levels since the previous MPC meeting.
It explained that globally, tight monetary policies in advanced and emerging market economies contributed to the decline in inflation, as some central banks continued to cut interest rates as inflation approached its target levels. MPC noted that while the economic growth rate is largely stable, its outlook remains vulnerable to downside risks due to the negative impact of restrictive monetary policies on economic activity. The Committee also indicated upward risks around inflation, in light of the volatility in the global prices of major commodities, especially energy. This is mainly due to supply chain disruptions resulting from geopolitical tensions.
On the local front, real GDP witnessed a growth of 2.4% in the second quarter of 2024 compared to about 2.2% in the first quarter of 2024, indicating a slowdown in growth during the fiscal year 2023/2024 to 2.4% compared to about 3.8% during the fiscal year 2022/2023. This slight increase in the second quarter (Q2) of 2024 is due to the increasing contributions of the sectors of non-oil manufacturing, construction and building, and trade to the GDP. Additionally, MPC said that preliminary indicators for the third quarter of 2024 show a gradual recovery in real economic activity, expecting it to reach its maximum capacity by fiscal year 2025/2026. Additionally, estimates indicate that real GDP is still below its maximum capacity, which supports the expected downward path of inflation during the coming period.
Furthermore, according to the committee, the data indicate that the annual rate of general and core inflation will stabilize at around 26.4% and 25.0%, respectively, in September 2024. Non-food commodities were the main driver of inflation during August and September 2024, as a result of the measures taken by the state to control the public finances, which limited the positive impact of both the gradual decline in the impact of previous shocks, the decline in food inflation, and the positive impact of the base period.
The committee believes that the gradual decline in food inflation, along with the improvement in inflation expectations since the beginning of the year, indicates that inflation could continue on its downward path, though constrained by the measures to control the public finances.
Additionally, inflation is expected to stabilize at its current levels until the fourth quarter (Q4) of 2024, despite some upward risks, including the continuation of regional tensions, the rise in global commodity prices, and the possibility that public finance control measures will have an impact that exceeds expectations. The Committee also expects inflation to decline starting from the first quarter (Q1) of 2025, with the cumulative impact of monetary tightening decisions and the positive impact of the base period being realized.
The Committee believes that in light of the above and based on MPC’s decision in its last meeting, keeping CBE’s basic return rates unchanged is suitable for the current period until the inflation rate declines significantly and sustainably.
The Committee confirmed that it will continue to follow a data-based approach to determine the appropriate level and duration of monetary tightening, based on its assessment of inflation expectations, the development of monthly inflation rates, and the effectiveness of the monetary policy transmission mechanism.
The Committee also confirmed that it will not hesitate to use all available monetary policy tools to enhance the downward path of inflation and achieve price stability in the medium term.
