In a recent decision, Egypt's Central Bank announced its Monetary Policy Committee (MPC) would maintain the current interest rates, surprising some analysts who had expected a rate hike. The overnight deposit rate, overnight lending rate, and the main operation rate remained at 19.25 percent, 20.25 percent, and 19.75 percent, respectively. The discount rate also stayed unchanged at 19.75 percent.
This decision comes after a series of interest rate hikes since March 2022, totaling 12 percent. The central bank's pause on interest rate changes signals a cautious approach to addressing the country's economic challenges.
One of the key factors influencing the MPC's decision is Egypt's soaring inflation rate. Annual headline inflation reached a record high of 37.4 percent in August 2023, up from the previous month's 36.4 percent, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS). However, there was a slight decrease in the monthly inflation rate from around 1.9 percent in July to 1.6 percent in August.
The central bank's decision aligns with its inflation targets. Egypt's central bank has set two inflation targets: the first aims for an average inflation rate of seven percent, plus or minus two percent, by the fourth quarter of 2024. The second target is an average inflation rate of five percent, plus or minus two percent, by the fourth quarter of 2026.
The MPC explained its rationale for maintaining interest rates in a statement, highlighting that recent inflation dynamics were mainly driven by supply chain disruptions and adverse weather conditions affecting seasonal price increases on agricultural products. The committee acknowledged that while annual food inflation continued to rise, it was primarily due to volatile items, as opposed to core food items.
Expert analysis largely anticipated this decision, with many experts believing that the central bank would wait to assess the impact of its previous rate hikes on inflation before considering further adjustments. Egypt's economic growth has been slowing, with the MPC reporting a 3.9 percent GDP growth rate in the January-March quarter, bringing the total GDP growth for the first nine months of fiscal year 2022/23 to 4.1 percent.
Looking ahead, the MPC expects a moderation in real GDP growth in the second quarter of 2023 and anticipates slower economic growth for fiscal year 2022/23 compared to the previous year. However, there are hopes of a gradual economic recovery over the medium term.
Some analysts had speculated that the central bank might raise rates to combat inflation, which exceeded earlier forecasts in August. While headline inflation remained high, core inflation, which excludes volatile items, experienced a slight decline, falling from 40.7 percent in July to 40.4 percent in August.
The central bank's decision reflects its careful balancing act between addressing inflation concerns and supporting economic growth. It will continue to monitor economic data closely and assess the cumulative impact of previous tightening policies on the Egyptian economy in the coming months.