CBE Explains Reasons for Keeping Interest Rates Unchanged

The Central Bank of Egypt revealed, Wednesday, the reasons for keeping interest rates unchanged.

The bank explained in a statement, Thursday, that this decision reflects the latest developments and expectations at the global and local levels since the previous meeting of the Monetary Policy Committee.

The Monetary Policy Committee decided in its meeting on Thursday, November 21, 2024, to maintain the overnight deposit and lending rates and the Central Bank’s main operation rate at 27.25%, 28.25%, and 27.75%, respectively.

It also decided to maintain the credit and discount rate at 27.75%.

The statement said: On the global level, the restrictive monetary policies adopted by advanced and emerging market economies contributed to the decline in inflation globally, and accordingly some central banks moved to gradually reduce interest rates, while maintaining the downward path of inflation to reach its targeted levels.

It continued: While the economic growth rate is largely stable, its prospects are still subject to some risks, including the impact of restrictive monetary policies on the growth of economic activity, geopolitical tensions, and the possibility of a return to protectionist trade policies.

Despite the increasing expectations of a decline in global commodity prices, especially energy, the upward risks surrounding inflation remain, as commodity prices remain vulnerable to supply shocks such as global turmoil and bad weather conditions.

It added: On the local side, preliminary indicators for the third quarter of 2024 show real GDP growth at a faster pace than the 2.4% recorded in the second quarter of the same year.

Economic activity forecasts for the fourth quarter of 2024 indicate that its upward trend will continue, although it has not yet reached its full potential, which supports the downward path of inflation in the short term, and it is expected to recover by the fiscal year 2024/25. As for the unemployment rate, it witnessed a slight increase to 6.7% during the third quarter of 2024 compared to 6.5% during the second quarter of the same year, as the pace of job creation did not keep pace with the growth rates of expatriates entering the labor market.

General annual inflation remained largely stable for the third consecutive month, at 26.5% in October 2024, driven mainly by the rise in prices of administratively specified non-food commodities such as liquefied petroleum gas (butane cylinders) and medicines.

This is consistent with the slight decline in annual core inflation to 24.4% in October 2024 from 25.0% in September 2024, as well as the decline in annual food inflation, which reached 27.3% in October 2024; its lowest rate in two years.

These results, along with the slowdown in the pace of monthly inflation rates, indicate an improvement in inflation expectations and its continuation on the downward path, despite being affected by fiscal consolidation measures.

Inflation is expected to stabilize at its current levels until the end of 2024, although it is surrounded by some upside risks, including continued geopolitical tensions, signs of a return to protectionist policies, and the possibility that fiscal consolidation measures will have an impact beyond expectations. However, inflation is expected to decline significantly starting from the first quarter of 2025 with the cumulative impact of monetary tightening decisions and the positive base effect.

In light of developments at the local and global levels, the Committee believes that keeping the Central Bank’s key interest rates unchanged is appropriate until a significant and sustainable decline in the inflation rate is achieved.

The Committee indicates that it will continue to follow a data-driven approach to determine the appropriate duration of monetary tightening, based on its assessment of inflation expectations, the evolution of monthly inflation rates, and the effectiveness of the monetary policy transmission mechanism.

CBE