Against all expectations and unlike many central banks worldwide, Egypt’s central bank (CBE) decided on Thursday to keep its key interest rates unchanged for the third time in a row.
The CBE kept its rates on hold at its last two meetings, on June 23 and August 18, but raised them by 200 bps in May, saying it was seeking to curb inflation expectations after prices climbed by their fastest in three years.
The central bank’s Monetary Policy Committee (MPC) has in today’s meeting maintained its overnight lending rate at 11.25 percent, its overnight deposit rate at 12.25 percent, and discount rate at 11.75 percent.
The CBE has also decided to increase the required reserve ratio to 18 percent from 14 percent, saying: “This works as a catalyst, complementing the tightening stance that the CBE is maintaining, by calibrating liquidity conditions.”
The central bank explained in a statement its decision to keep interest rates on hold.
Firstly, the CBE explored the global front condition amid forecasts for the global economic activity have dampened due to spillover effects from the conflict between Russia and Ukraine.
“Furthermore, global financial conditions are expected to tighten further as major central banks continue to raise policy rates and reduce asset purchase programs with the aim of containing increased inflationary pressures in their respective countries. In contrast, global commodity prices, such as international prices of oil, have slightly declined, as a result of weakening demand due to global recession expectations.” CBE added.
On the other hand, CBE said Egypt’s economic activity has grown by a preliminary figure of 3.2 percent in the second quarter of 2022, implying that financial year 2021/22 registered a growth rate of 6.6 percent, compared to 3.3 percent in the previous financial year.
“Latest available data for the first nine months of the financial year shows that GDP growth was mainly driven by the private sector, particularly non-petroleum manufacturing, tourism, and trade, the central bank added. “Meanwhile, public sector activity was supported by natural gas extractions, Suez Canal and the general government. Moreover, select leading indicators continue to register positive growth rates in 2022 Q3.
“However, economic activity is expected to grow at a slower rate than previously projected, given the uncertainty and negative spillovers from the global scene.” “In the labour market, both employment and the labour force figures increased by similar magnitudes, therefore, the unemployment rate remained stable at 7.2 percent in 2022 Q2.”
Therefore, the MPC further said it “concurs that the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term.”
“Noting that the previous tightening policy rates by 300bps is still transmitting through the economy, the MPC will continue to assess the impact on inflation expectations and other macroeconomic developments over the medium term.”
“The elevated annual headline inflation rate will continue to be temporarily tolerated above the CBE’s pre-announced target of 7 percent (±2 percentage points) on average in 2022 Q4.”
The CBE said it will remain committed to achieving low and stable levels of inflation over the medium term which is a requisite condition towards sustainable economic growth.
The MPC added that it will keep monitoring the global and domestic conditions for further developments and will not hesitate to utilise all available tools to achieve its price stability mandate over the medium term.
“The MPC reiterates that the path of future policy rates remains a function of inflation expectations rather than of prevailing inflation rates.” CBE statement concluded.
