The Monetary Policy Committee of the Central Bank of Egypt decided, in its meeting on Thursday, February 1, 2024, to raise the overnight deposit and lending interest rates and the central bank’s main operation rate by 200 basis points to reach 21.25%, 22.25%, and 21.75%, respectively. The credit rate was also raised. The discount is 200 basis points, reaching 21.75%.
At the global level, economic activity has been characterized by a slowdown as a result of the monetary restrictive policies pursued by central banks as a result of the monetary restrictive policies that have been followed on major demand. Global inflationary pressures have also decreased recently, and accordingly inflation rate expectations for those economies have declined compared to what was presented at the previous meeting in many advanced and emerging economies.
However, there is a state of uncertainty about inflation expectations, especially with regard to global commodity prices, as a result of the geopolitical tensions that the world is currently witnessing and disruption in navigation traffic in the Red Sea.
On the local level, the real gross domestic product recorded a growth rate of 2.7% during the third quarter of 2023, and the growth was supported by the positive contributions of both the trade and agricultural sectors, at a rate compared to 2.9% during the previous quarter.
Despite this, preliminary indicators for the fourth quarter of 2023 indicate a slowdown in economic activity, and accordingly, the GDP growth rate is expected to slow during the fiscal year 2023/2024 compared to the previous fiscal year, and to recover gradually thereafter.
This was in line with the actual developments in the data, as well as the negative repercussions resulting from the state of regional instability and disruption of navigation traffic in the Red Sea on the services sector.
With regard to the labor market, the unemployment rate stabilized to record 7.1% during the third quarter of 2023, and the annual rates of general and core inflation continued to decline to record 33.7% and 34.2%, respectively, in December 2023, driven by the positive impact of the base period.
Current developments indicate the continuation of inflationary pressures and their rise above their usual pattern, which is reflected in the inflation of both food and non-food commodities.
These pressures are expected to continue in light of public financial control measures, as well as continued pressures from the supply side.
In addition, the higher rate of domestic liquidity growth than its historical average contributed to the escalation of inflationary pressures.
Data received since the previous Monetary Policy Committee meeting in December 2023, including inflation data, were higher than expected. Broad-based inflationary pressures will continue to influence consumption and pricing patterns. In addition, geopolitical tensions and maritime disruption may result in increased uncertainty about global and local inflation rates.
In light of the above, the Monetary Policy Committee sees escalating risks surrounding inflation expectations. Consequently, the Monetary Policy Committee decided to raise the central bank’s key return rates by 200 basis points, with the aim of reducing inflation expectations and restricting monetary conditions to maintain a downward path for inflation rates.
The Committee will continue to evaluate risk balances with the aim of achieving price stability in the medium term, and will not hesitate to use all its available tools to restrict monetary conditions. The Committee also emphasizes that the path of key return rates depends on expected inflation rates.
