CBE Reveals Reasons for Keeping Interest Rates Unchanged

The Monetary Policy Committee of the Central Bank of Egypt (CBE) decided, in its meeting on Thursday 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 keep the credit and discount rates at 27.75%. This decision reflects the latest developments and expectations at the global and local levels since the previous MPC meeting.

The central bank statement said that at the global level, the outlook for economic growth remained positive, even if its expected rates were lower than the historical average. Despite the decline in inflation rates globally, major central banks continued their restrictive monetary policies to ensure that the inflation rate converged towards its target levels. 

With regard to global commodity prices, especially energy, the outlook on supply and demand developments in the medium term remains uncertain, especially as supply remains vulnerable to shocks resulting from geopolitical tensions. 

In emerging economies, credit risk prospects have improved amid expectations of easing monetary policies in advanced economies.

At the local level, the real GDP recorded a growth rate of 2.3% during the fourth quarter of 2023, with the first half of the fiscal year 2023/24 recording a growth rate of 2.5% compared to 4.2% during the corresponding period of the previous year. This slowdown is due to the contribution of the industrial sector to growth has declined.

As for the Q1 of 2024, preliminary indicators indicate continued weakness in economic activity, and therefore the growth rate of GDP is expected to slow during the fiscal year 2023/24 compared to the previous fiscal year. Economic activity is expected to recover beginning in the 2024/2025 fiscal year.

The bank added that inflationary pressures continue to decline, especially with general and core inflation reaching their peaks at 38.0% in September 2023 and 41.0% in June 2023, respectively.

The downward trend in inflation continued despite its unexpected rise during February 2024, as both headline and core inflation fell to 32.5% and 31.8% in April 2024, respectively.

The positive effect of the base period contributed to reducing inflation rates during 2024 due to periods of high inflation during 2023. The annual rate of general inflation was mainly driven by the contribution of food items since December 2022, although the rise in non-food inflation has limited the continuing decline in food commodity inflation since November. 2023.

The latest inflation developments since the extraordinary Monetary Policy Committee meeting on March 6, 2024 are an early indicator of the return of monthly inflation rates to their usual pattern before March 2022.

Expectations indicate that inflation will moderate during 2024 as inflationary pressures subside, especially since it has already reached its peak. Inflation is expected to decrease significantly during H1 of 2025 as a result of a combination of several factors, including restrictive monetary policy, unification of the foreign exchange market, and the positive effect of the base period.

Moreover, several things will contribute to achieving price stability, including large foreign direct investment inflows, a noticeable improvement in the external financing environment, and their positive impact on building foreign exchange reserves, in addition to the increasing domestic and foreign demand for assets denominated in the Egyptian pound.

Recent developments in the exchange rate will support tightening monetary conditions, which will stabilize inflationary expectations and contain future inflation prospects.

In light of the above, and taking into account the previous decisions of the Monetary Policy Committee to raise the basic interest rates by 800 basis points during the first quarter of 2024, the Committee believes that keeping the central bank’s basic interest rates unchanged is appropriate in the current period.