Egypt's central bank increases key interest rates by 3%, maintains inflation target at 7% through 4Q of 2024

Doaa A.Moneim , Thursday 22 Dec 2022

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has raised on Thursday the interest rates by three percent (300 bps), thus exceeding expectations.

Egypt s central bank


The MPC raised the overnight deposit rate, overnight lending rate, and the rate of the main operation to 16.25 percent, 17.25 percent, and 16.75 percent, respectively.

The discount rate was also raised by 300 basis points to 16.75 percent.

This is the highest increase since 3 November 2016 when the CBE raised its discount rate by 3 percent to reach 15.25 percent up from 12.25 percent.

This is the fourth time that the MPC has decided to raise key interest rates since the start of the Russia-Ukraine war in February, totaling 8 percent, in an attempt to curb inflation triggered by the war.

The annual core inflation rate recorded 21.5 percent in November, up from 19 percent in October, according to the CBE.

The MPC had raised key interest rates by a total of 500 bps, in three separate moves, since the start of the war in Ukraine.

Analysts had expected that the MPC would raise the interest rates by a maximum of 2 percent (200 bps) to rein in inflation.

The latest MPC decision comes a week after after the announcement of a new International Monetary Fund (IMF) $3 billion loan for Egypt.

Soaring inflation 

MPC also maintained its target of inflation at seven percent (±2 percent) through the fourth quarter of 2024, while it reduced the target to five percent (± 2 percentage points) on average by fourth quarter of 2026.

Egypt's economy is pressured by inflation as annual headline urban inflation continued to accelerate further during the fourth quarter (4Q) of 2022, reaching 18.7 percent in November 2022, the highest rate since December 2017.

Similarly, annual core inflation continued its upward trend that started over a year ago, recording 21.5 percent in November 2022, its highest rate since November 2017.

“November’s 2022 inflation figure was mainly impacted by the depreciation of the Egyptian pound that took place in October 2022, as well as the higher broad money growth and the ongoing repercussions of the Russia-Ukraine conflict. Since the beginning of calendar year 2022, annual food inflation was mainly driven by core food inflation," the CBE statement read. 

"Moreover, the annual inflation of services was mainly driven by expenditure on restaurants and cafes, while the increase in retail items was broad-based. Given these developments, annual headline inflation is expected to remain above the MPC’s pre-announced target of seven percent (±2 percent) on average in 4Q of 2022,” the MPC added.

It also said that high demand has triggered more inflationary pressures on the economy and caused an increase in prices.

On the local level, economic activity rose in the third quarter of 2022, posting a preliminary figure of 4.4 percent, up from 3.3 percent in the second quarter of 2022, driven primarily by the positive contributions of agriculture, wholesale and retail trade and tourism, according to the MPC.

Moreover, most leading indicators continue to attain positive growth rates in the fourth quarter of 2022, while the unemployment rate recorded 7.4 percent in the third quarter of 2022, slightly up from the 7.2 percent recorded in the previous quarter, as per the MPC estimates.

On the global level, MPC said that forecasts for international commodity prices have slightly eased compared to those underlying the previous MPC meeting held in October.

“In addition, financial conditions broadly stabilised, with several central banks indicating that their inflation may have peaked and potentially started its deceleration path. Nonetheless, the outlook for international commodity prices remains uncertain, as several factors contribute to upside and downside pressures. Notable factors include the expected global economic slowdown, the loosening of COVID-19 restrictions in China, and the continued uncertainty from the Russia-Ukraine conflict on the overall outlook for global supply chains”, according to the MPC.

The MPC stressed that it closely monitors all economic developments and will continue to utilise all available monetary policy tools to anchor inflation expectations, contain demand-side pressures and second-round effects emanating from supply shocks that may lead to deviations from inflation targets.

“The MPC reiterates that the path of future policy rates remains a function of inflation expectations, rather than of prevailing inflation rates and will continue to pursue its price stability mandate”, it concluded.

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