The Central Bank of Egypt violates expectations and sets interest rates

The Monetary Policy Committee of the Central Bank of Egypt has decided to maintain the rates of return on overnight deposits and loans and the central bank’s main transaction price at 16.25%, 17.25% and 16.75% respectively %. The credit and discount rate was maintained at 16.75%.

Slightly higher expectations

The Central Bank of Egypt said that globally, commodity price expectations prime global indicators indicate a slight increase from the expectations presented to the Monetary Policy Committee at its previous meeting.

Conversely, the financial conditions of the US economy continued to ease, while in the Eurozone these conditions generally stabilised, compared to the information available at the previous meeting of the Monetary Policy Committee. However, many factors continue to contribute to the lingering uncertainty associated with the global commodity price outlook prime. The most important of these factors is the expected slowdown in global economic activity, the easing of precautionary measures related to the Corona epidemic in China and the continuation of the Russo-Ukrainian crisis.

Recovered during the third trimester

At the local level, economic activity recovered during the third quarter of 2022, recording a real GDP growth rate of 4.4%, compared to 3.3% in the second quarter of 2022. The recovery was driven by an improvement in economic activity in the sectors of tourism, agriculture and wholesale and retail trade. Furthermore, most preliminary indicators continued to record positive growth rates, albeit at a slower pace, during the fourth quarter of 2022.

Over the next period, the GDP growth rate is expected to follow a moderate pace in the 2022-2023 fiscal year compared to the previous fiscal year, before picking up again in following. As regards the labor market, the unemployment rate recorded 7.4% in the third quarter of 2022, compared to a media by 7.2% in the previous quarter.

High inflation

The annual general urban inflation rate increased to 21.3% in December 2022, and the annual core inflation rate continued to rise to 24.4% during the same month. The annual rate of general inflation has registered a media by 18.7% in the fourth quarter of 2022, compared to the previously announced target by the Central Bank of 7% (± 2 percentage points) in media during the same period. These developments are a result of the impact of the Russian-Ukrainian conflict and the disruption of global procurement and supply chains on both rising global commodity prices, despite their recent declines, and fluctuations in the rate of exchange rate of the Egyptian pound since March 2022, plus other demand-side inflationary pressures.

The Monetary Policy Committee points to the persistence of inflationary pressures on the demand side, which have been reflected in the evolution of real economic activity relative to its maximum productive capacity and in the impact of recent fluctuations in exchange rates, developments consistent with the ‘increase in the domestic exchange rate growth rate of liquidity. To cope with inflationary pressures, the Monetary Policy Committee increased in proactively lowered the Central Bank of Egypt’s base interest rates by 800 basis points over the past year, including 500 basis points during the fourth quarter of 2022.

Increase the cash reserve ratio

The committee also increased the percentage of liquidity buffers that banks are required to hold at the central bank by 400 basis points in September 2022. The committee believes that the EPC’s proactive policy aims to control inflationary pressures and reduce inflation expectations. inflation at the target level of 7 % (± 2 percentage points). ) in media in the fourth quarter of 2024.

And because the future path of inflation rates depends on cumulative interest rate increases to date, which takes time to affect inflation rates, the Monetary Policy Committee decided to keep the Bank’s base interest rates unchanged of Egypt, in order to assess the impact of the proactive restriction policy in based on the availability of economic data in the period ahead. The Committee stresses that developments in base interest rates depend on expected inflation rates and not on prevailing inflation rates. It also underlines that tight monetary conditions are a prerequisite for achieving targeted inflation rates and the objective of price stability in the medium term.

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