Egypt's central bank keeps interest rates unchanged, resets inflation target to 7%

Doaa A.Moneim , Thursday 24 Dec 2020

CBE announces it has reset next inflation target to be at 7 percent during the fourth quarter of 2022 down from 9 percent to support macroeconomic stability


The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided on Thursday to keep the current overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 8.25 percent, 9.25 percent, and 8.75 percent, respectively.

The discount rate was also kept unchanged at 8.75 percent.
The MPC attributed its decision to the accelerated annual headline urban inflation, which rose for the third consecutive month to 5.7 percent in November 2020 from the 4.5 percent in October 2020.
It explained that higher annual headline inflation has been mainly driven by higher annual contribution of selected food items since September 2020, while annual core inflation increased only slightly to 4.0 percent in November 2020 from 3.9 percent in October 2020.
The CBE expected that average annual headline inflation is estimated to be in the low single digits range - in the fourth quarter of 2020 - with increasing likelihood of coming under the inflation target floor of six percent.
“The magnitude of a possible deviation from the target would mainly depend on the degree of the reversal of the supply shock of tomatoes, among other factors," said CBE in a statement.
Real GDP growth increased to 0.7 percent during the third quarter of 2020, up from -1.7 percent during the second quarter of 2020, according to CBE.
Moreover, growth registered a preliminary figure of 3.6 percent in FY 2019/2020 compared to the 5.6 percent a year earlier.
CBE also added, Egypt’s eonomic activity was affected by the impact of COVID-19 and its resulting containment measure, in addition, most demand side leading indicators for October and November 2020 show continued signs of recovery after displaying weakness during the second quarter of 2020.
Furthermore, the unemployment rate recorded 7.3 percent in the third quarter of 2020, the lowest rate on record, down from 9.6 percent in the second quarter of 2020.
Globally, CBE said that economic activity remains subdued despite the accommodative financial conditions, as the outbreak of the second wave of COVID-19 pandemic and its related lockdown measures weigh on the near-term outlook.
On the other hand, CBE expect the continued development and roll-out of vaccines to ease the level of uncertainty regarding economic activity over the medium term. Meanwhile, international oil prices started to slightly pick up recently.
CBE announced that it has reset its next inflation target to be at 7 percent (±2 percentage points) on average during the fourth quarter of 2022, down from 9 percent (±3 percentage points) on average that was targeted for the same quarter, explaining that this action came as the CBE continues to support macroeconomic stability.
It added that monetary policy tools are utilized to anchor inflation expectations, contain demand-side pressures and second-round effects of supply shocks. Exogenous factors that are outside the scope of monetary policy may lead to transitory deviations from previously announced target rates.
CBE also expected Egypt’s GDP growth to recover albeit gradually, with structural measures expected to support economic activity.
On the other hand, annual headline inflation rates are expected to be affected by unfavorable base effects related to the normalisation of monthly inflation rates in 2021, but will continue hovering around the inflation target’s mid-point of 7 percent in 2022, according to the CBE.
CBE expounded that keeping key interest rates unchanged at this juncture remains consistent with achieving the inflation target of 7 percent (±2 percentage points) in the fourth quarter of 2022 and price stability over the medium term, adding that MPC closely monitors all economic developments and will not hesitate to utilise available tools to support the recovery of economic activity, within its price stability mandate.
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