The Central Bank of Egypt (CBE) announces on May 19th raising key interest rates by 2%, or 200 basis points, as the government attempts to deal with the negative economic repercussions of the Russian-Ukrainian war and curb inflationary pressures.
The bank’s Monetary Policy Committee (MPC) increased the deposit rate to 11.25% from 9.25% and the lending rate to 12.25% from 10.25%.
This is the second time in less than two months for the MPC to raise key interest rates.
On March 21st, the MPC raised key interest rates by one percent – in the first such move since 2017, as part of the government’s attempts to deal with the negative economic repercussions and global inflationary pressures due to the Russian-Ukrainian war.
The MPC attributes its decision today to the slowdown of global economic activity and global inflationary pressures due to ongoing Russian-Ukrainian war.
“Trade sanctions imposed on Russia and corresponding supply-chain bottlenecks have elevated global commodity prices, such as international prices for oil and wheat, with the latter’s global supply also impacted by adverse weather conditions and poor harvests in select regions,” the MPC says.
The committee adds that global financial conditions have tightened, as major central banks have continued to both tighten policy rates and reduce 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.
“Prior to the Russian-Ukrainian war, domestic economic activity continued to expand in 4Q of 2021, recording a preliminary year-on-year growth rate of 8.3 percent, the second highest real GDP growth rate since 3Q 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 comments.
The MPC explains that most leading indicators for economic activity have started recently to gradually normalize, and are expected to continue this trend over the near term, as the strong positive base effect diminishes.
The committee also attributes its decision to the annual headline urban inflation that increased to 13.1% in April 2022, up from 10.5% in March 2022, which was at the highest level since May 2019.
“In addition, annual core inflation, which excludes volatile food and regulated items, continued its upward trend to record 11.9% in April 2022, from 10.1 percent in March 2022, its highest level since April 2018. This increase is attributed mainly to food items and further supported by non-food items,” the committee points out.
It also expects that the elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s target of seven percent (±2%) on average through the end of 2023.
The MPC asserted it will continue to closely monitor all economic developments and will not hesitate to utilise all available tools to achieve its price stability mandate over the medium term.
The Egyptian government seeks to create an attractive atmosphere for the investors in terms of debt instrument investment, also known as hot money, amid the tighter policy the US Fed has started to apply since March to contain the global inflationary wave.
