CBE Reviews Reasons behind Fixing Interest Rates for Fourth Time

The Monetary Policy Committee of the Central Bank of Egypt (CBE) reviewed the reasons that prompted it to fix interest rates on lending and deposits for the fourth time in a row during the 2021, led by inflation.

According to a statement by the CBE, during its meeting on Thursday, the overnight deposit and lending rates and the price of the main operation of the Central Bank remained unchanged at the level of 8.25%, 9.25% and 8.75%, respectively, and the discount at 8.75%.

The decision of the MPC was to maintain interest rates for the fifth time in a row since its last meeting in December 2020, and for the fourth time in a row this year.

The committee stressed that it considers that the basic interest rates at the Central Bank are appropriate at the present time, and are consistent with achieving the target inflation rate of 7% (± 2%) on average during the Q4 of 2022 and price stability in the medium term, for the following reasons:

Inflation

The committee stated that the annual general urban inflation rate rose to 4.8% in May 2021, compared to 4.1% last April, after declining from 4.5% in March 2021.

It said that the annual general inflation rates were affected by both the positive and negative impact of the base year during April and May 2021, respectively, to reflect the impact of the spread of the coronavirus pandemic and the precautionary measures related to it on inflation rates during 2020.

The committee expected that inflation rates will continue to reflect the negative impact of the base year in the near term. It attributed the increase in the annual general inflation rate in May 2021 mainly to the high annual contribution of fresh vegetables and fruits.

Accordingly, it added, the annual inflation rate of food commodities rose in May 2021 to 1.7% from negative 0.3% in April 2021, while the annual inflation of non-food goods rose slightly for the second month in a row to 6.3% in May 2021 from 6.1% last April.

The annual core inflation rate also witnessed a slight increase to 3.4% in May 2021, compared to 3.3% in April 2021, after declining from 3.7% in March 2021.

Growth

The reasons that prompted the MPC to fix interest rates for the fourth time included growth rates, as preliminary data indicate that the real GDP growth rate recorded 2.9% during Q1 of 2021, compared to 2% during the previous quarter.

Detailed data during the last quarter of 2020 also indicated the continued contribution of consumption - especially private consumption - to supporting the growth rate, while the negative contribution of both total domestic investment and net exports has receded.

The committee explained that the growth came according to the various sectors of the economy, supported by the positive contributions of the trade, construction and communication sectors, while the negative contributions of the tourism and non-oil manufacturing sectors continued despite their recent decline.

The committee expected that the real GDP growth rate would rise, partially driven by the positive impact of the base year. In addition, preliminary indicators indicate a continuation of recovery in the rest of the various sectors of the economy.

On the other hand, the unemployment rate stabilized at 7.4% during the first quarter of 2021, compared to 7.2% during the previous quarter.

Global price hike

At the global level, economic activity continued to recover unevenly at the level of different sectors and countries, as a result of the inability of some countries to contain the spread of the pandemic.

The committee considers that the recovery of global economic activity depends on the developments in the spread of the pandemic, in addition to the effectiveness, availability and speed of distribution of vaccines.

It said, it is expected that the appropriate financial conditions that support global economic activity will continue in the medium term.

At the same time, global prices of oil, foodstuffs and other primary commodities rose, thus continuing the prevailing uncertainty - according to monetary policy - about the future course of those prices. In light of the foregoing circumstances, the committee added, the rises in world prices for oil and other primary commodities were driven by developments in terms of supply and demand.