Against all odds, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) resolved on Thursday to increase key interest rates by one percent (100 basis points) at its first meeting in FY2023/2024 and fifth in 2023.
This raise brings the total hikes the CBE has applied since the start of 2023 to three percent (300bps).
Accordingly the overnight deposit rate, overnight lending rate and the rate of the main operation rose to 19.25 percent, 20.25 percent and 19.75 percent, respectively. The discount rate was also hiked to 19.75 percent.
With this movement, the CBE has raised the key interest rates a total of 12 percent (1200 bps) since March 2022.
All expectations before the meeting leaned towards maintaining the current interest rates to allow the local market to absorb the 10 percent (1000 bps) hikes the CBE applied from March 2022 till June 2023.
The CBE attributed its action to the soaring inflation, which hit record levels in June.
The annual urban headline inflation jumped to 35.7 percent in June, up from 32.7 percent in May.
Similarly, the annual core inflation increased to 41.0 percent in June, up from 40.3 percent in May.
“The annual inflation rates continued to be affected by persistent supply shocks, which fed through higher underlying pressures. Accordingly, the annual acceleration in headline and core inflation during June 2023 is driven by broad-based increases in the prices of most of the Consumer Price Index (CPI) items”, the CBE stated.
The CBE added that the growth of real economic activity remained unchanged in the first quarter of 2023 at 3.9 percent, compared to the previous quarter.
As per the CBE, figures of this quarter show that economic activity is mainly supported by the positive contributions of tourism, agriculture and construction.
For the second quarter of the year, the CBE noted that the data indicates a moderation of real GDP growth.
“Given the above, real GDP growth is expected to slow down in FY2022/23 compared to the previous fiscal year, before picking up gradually over the medium term. Meanwhile, the unemployment rate slightly declined to 7.1 percent in 2023 Q1 compared to 7.2 percent in the previous quarter, mainly due to an increase in employment”, according to the CBE.
On a global level, the CBE noted that the outlook of key international commodity prices have dropped slightly compared to forecasts underlying the June MPC meeting, while actual spot prices of crude oil have risen.
“In addition, forecasts for headline inflation in key global economies have been revised downwards compared to the June MPC meeting, despite remaining above their respective target levels”, the CBE pointed out.
The CBE stated that the decision comes in light of the global and local economic updates, in addition to the given balance of risks surrounding the inflation outlook, in order to contain the inflationary pressures and anchor inflation expectations around the CBE’s targets.
The CBE set two targets for inflation; the first is seven percent (± 2 percent) on average by the fourth quarter of 2024, while the second is five percent (± 2 percent) on average by the fourth quarter of 2026.
“The committee will not hesitate to utilize all its available tools to ensure that the policy stance is set at sufficiently restrictive levels with the aim of attaining the CBE’s upcoming inflation targets,” the CBE affirmed.
