Egypt's central bank raises interest rates 200bps during May

Egypt's central bank raises interest rates 200bps during May Fri, May. 20, 2022
CAIRO – 21 March 2022: The Monetary Policy Committee (MPC) decided, Tuesday to raise the Central Bank of Egypt’s (CBE) overnight deposit rate, overnight lending rate, and the rate of the main operation by 200 basis points to 11.25 percent, 12.25 percent, and 11.75 percent, respectively.

The discount rate was also raised by 200 basis points to 11.75 percent.

The CBE’s decision comes in light with Fitch credit rating agency’s expectations that the central bank would raise interest rates at the Monetary Policy Committee’s meeting.

It stated that the central bank is expected to raise the interest rate between 2 percent and 3 percent at today's meeting.

The MPC decided that raising policy rates is necessary to contain inflationary pressures which is consistent with achieving price stability over the medium term.

Egypt’s annual consumer price inflation recorded 14.9 percent in April 2022, compared to 4.4 percent in the same month of 2021. As for urban inflation, it surged in April to 13.1 percent, reaching the highest level since May 2019, compared to 10.5 percent in March.

The annual core inflation rate recorded 11.9 percent in April 2022, compared to 10.1 percent in March 2022, its highest level since April 2018, according to the Central Bank of Egypt (CBE).

“This increase is attributed mainly to food items and further supported by non-food items. While both were affected by the depreciation in the Egyptian pound that occurred on the 21st of March 2022 and seasonal patterns, several other factors contributed to the increase in food prices; namely adverse weather conditions and high fertilizer prices that caused tomato prices to soar,” the statement said.

Meanwhile, It referred to the impact of the Russian-Ukrainian war on the prices of wheat, wheat derivatives, and other food commodities, in addition to the continued seasonal inflationary impact of Ramadan, and the occurrence of multiple holidays during April 2022, increased the prices of the rest of the core food products.

The MPC attributed that slow down in the economic activity that the world is currently facing to the tensions between Russia and Ukraine which affected the global supply chain which in turn caused a rise in the commodity prices.

It also referred to the central banks trend toward tightening policy rates and reducing asset purchase programs with the aim of containing increased inflationary concerns in their respective countries.

“In addition, recently introduced COVID-19 lockdowns in China have raised concerns about exacerbating existing global supply-chain disruptions,” it added.

According to the MPC statement, Egypt’s economy recorded a growth rate of 8.3 percent during the fourth quarter of 2021- prior to the Russian-Ukrainian crisis - to record the second highest real GDP growth rate since the third quarter of 2002.

“This was partially supported by the robust growth in tourism, construction and manufacturing, as well as a positive base effect emanating from the low growth rates in the same period in 2020, resulting from the COVID-19 containment measures,” the Committee commented.

Recently, most leading indicators for economic activity have started to gradually normalize, and
are expected to continue this trend over the near term, as the strong positive base effect diminishes, it added.

It expected the economic activity to continue to expand albeit at a slower-than previously projected pace, partially due to the unfavorable spillovers of international developments emanating from the Russian-Ukrainian war.

Regarding the labor market, the unemployment rate declined in 2022 Q1, registering 7.2 percent.

The witnessed decline stemmed from the increase in employment figures which more than offset the increase in the labor force.