The Central Bank of Egypt (CBE) has exceeded expectations by taking steps to stabilize interest rates. It has announced an increase of 100 basis points in the rates of deposit yield, lending for one night, and the price of the Central Bank’s main operation. The new rates stand at 19.25 percent, 20.25 percent, and 19.75 percent, respectively.
The credit and discount rate was raised by 100 basis points to 19.75 percent.
Since March 2022, CBE has increased interest rates by 1,000 basis points, but it has maintained the same rate during its meetings in May and June of this year.
Despite persistent high inflation, the central bank was widely anticipated to maintain interest rates. On Thursday, analysts dismissed the possibility of a rate hike by the central bank, particularly because it was expected to coincide with a further devaluation of the already weakened Egyptian pound.
Read more: Egypt Central Bank fixes interest rates after raising them 3 percent
The bank’s Monetary Policy Committee (MPC) made a statement. They announced an increase of 100 basis points to the central bank’s core return rates. The purpose is to control inflationary pressures and manage inflation expectations.
The Committee expects inflation rates to peak in the second half of 2023. After this, they will decrease and return to previous levels. Restrictive monetary policies are helping to support this outcome.
Inflation targets
MPC stressed in its statement that the direction of base return rates would be determined by projected inflation rates rather than current inflation rates.
The committee said they will monitor economic developments and use all monetary policy tools to maintain restrictive monetary conditions. The goal is to achieve average inflation targets of 7 percent (±2 percentage points) in Q4 2024 and 5 percent (±2 percentage points) in Q4 2026.
The committee assessed the domestic situation. They reported that the growth rate of real economic activity was stable at 3.9 percent in Q1 2023, compared to Q4 2022.
Preliminary data
Preliminary data for Q1 2023 indicates that tourism, agriculture, and construction made positive contributions to economic activity.
The bank forecasted a decrease in GDP growth for fiscal year (FY ) 2022/2023 compared to the previous year. This was based on Q2 2023 preliminary indicators. However, there is an anticipated gradual recovery in the medium term.
Regarding the labor market, there was a decrease in the unemployment rate from 7.2 percent to 7.1 percent in Q1 2023. This was mainly due to a rise in the number of employees.
General urban inflation increased year-on-year from 32.7 percent in May 2023 to 35.7 percent in June 2023.
In June 2023, the annual base inflation rate increased from 40.3 percent to 41.0 percent from May 2023. The Bank linked this to a widespread price increase in most consumer price index items. The cause was continuous supply shocks.
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