The Central Bank of Egypt (CBE) held a special meeting of the Monetary Policy Committee (MPC) to address the challenges facing the domestic economy. The existence of a parallel exchange rate market and external spillovers from global inflationary pressures have hindered economic growth and fueled inflation expectations.
To maintain price stability and support sustainable economic development, the CBE reaffirmed its commitment to a flexible inflation-targeting regime. The unification of the exchange rate is crucial to eliminate foreign exchange backlogs resulting from the disparity between official and parallel markets.
In light of these considerations and the need for monetary tightening, the MPC decided to raise key interest rates. The CBE’s overnight deposit rate, overnight lending rate, and the rate of the main operation were increased by 600 basis points to 27.25%, 28.25%, and 27.75 %, respectively. The discount rate was also raised by 600 basis points to 27.75%.
This decision follows a previous increase of 200 basis points in February 2024 to expedite the disinflation process and reduce underlying inflation. The MPC emphasized the importance of anchoring inflation expectations and bringing the real interest rate into positive territory.
While acknowledging the potential short-term contraction in private sector credit growth, the CBE emphasized that curbing excessive inflationary pressures is crucial for maintaining stability. Price stability provides a favorable environment for sustainable private sector growth in the medium term.
The announced measures are part of a comprehensive economic reform package implemented in coordination with the government. Adequate funding has been secured to ensure foreign exchange liquidity. Additionally, prudent monetary and fiscal policies will be employed to mitigate external spillovers and maintain macroeconomic stability, debt sustainability, and the accumulation of foreign exchange reserves.
The elimination of the parallel foreign exchange market is expected to reduce inflation forecasts and gradually lower headline inflation. However, regional geopolitical tensions, volatility in international commodity markets, and global financial conditions could pose upward inflation pressure. The CBE will communicate any reassessment of its inflation targets in response to these risks and changing macroeconomic dynamics.
The MPC will closely monitor the inflation outlook, aiming to strengthen credibility and establish a downward trajectory for inflation, in response to foreign exchange shortages. Future monetary policy decisions will be guided by forecasts of inflation and aimed at minimizing deviations from the inflation target and maintaining full capacity in the economy. The committee will utilize all available tools to fulfill its price stability mandate in the medium term.
