Egypt's Central Bank Raises Interest Rates by 2% to Combat Inflation

On Thursday, the Central Bank of Egypt's Monetary Policy Committee made a pivotal decision to increase the overnight deposit and lending rates, along with the central bank's main operation rate, by 200 basis points.

This adjustment sets the rates at 21.25%, 22.25%, and 21.75% respectively, in a strategic move to curb inflation and stabilize the national economy. Additionally, the credit and discount rate witnessed a similar rise, reaching 21.75%.

This decision comes at a time when the global economic landscape is marked by a slowdown, influenced by the stringent monetary policies of the world's leading central banks aimed at moderating demand. These measures have led to a decrease in global inflationary pressures, with many advanced and emerging economies revising their inflation forecasts downward.

However, the future of inflation rates remains uncertain, particularly due to fluctuations in global commodity prices driven by geopolitical tensions and disruptions in Red Sea navigation.

Within Egypt, the real GDP growth rate slightly dipped to 2.7% in the third quarter of 2023 from 2.9% in the previous quarter, with the trade, agriculture, and telecommunications sectors being key contributors to this growth. Despite this, there are signs of a slowdown in economic activity in the final quarter of 2023, indicating a potential deceleration in GDP growth for the fiscal year 2023/2024, with expectations of a gradual recovery in the following period.

 These projections reflect the impacts of regional instability and disruptions in Red Sea navigation on the services sector. The labor market has remained stable, with the unemployment rate at 7.1% during the third quarter of 2023.

Inflation rates in Egypt have been on a downward trajectory, with the annual general and core inflation rates standing at 33.7% and 34.2% respectively in December 2023.

Despite this decline, inflationary pressures persist, especially in food and non-food items, and are expected to continue due to public finance consolidation measures and supply-side pressures. An increase in domestic liquidity growth above its historical average further exacerbates these inflationary pressures.