Egypt Maintains Key Policy Rates Steady Amid Signs Of Economic Recovery In July 2024

In a recent move, the Central Bank of Egypt (CBE) made the decision to keep its benchmark interest rates steady, marking the third consecutive occasion without changes. This decision leaves the overnight deposit rate, overnight lending rate, and the rate the main operation at 27.25 percent, 28.25 percent, and 27.75 percent, respectively.

Furthermore, the discount rate will also remain at 27.75 percent. The Monetary Policy Committee (MPC) of the CBE, after its Thursday meeting, announced these rates, emphasizing their intention to maintain the current monetary stance.The MPC's decision is a reflection of both global and domestic economic conditions observed since their last meeting.

A key factor in their deliberation was the performance of Egypt's economy, which saw a slight dip in its real GDP growth, moving from 2.3 percent in Q4 2023 to 2.2 percent in Q1 2024. This downturn was attributed primarily to a decrease in public sector economic activity, influenced by disruptions in Red Sea maritime trade affecting the service sector.

Although there was an increase in private economic activity, it was not enough to counterbalance the public sector's decline. However, there is an anticipation of gradual economic recovery starting in the fiscal year 2024/25, after a significant slowdown in the previous fiscal year.

The gradual recovery of Egypt’s economy is evidenced by the updated leading indicators for Q2 2024, suggesting an uptick in real GDP growth. This recovery is expected to solidify in the upcoming fiscal year, despite the fact that real economic activity currently remains below its potential. This underperformance is, nonetheless, seen as a factor that will support a disinflationary trend in the near term, with projections indicating a convergence towards potential economic output over the medium term.

On the employment front, there's been a slight improvement with the unemployment rate dropping to 6.5 percent in Q2 2024 from 6.7 percent in Q1 2024. This decrease has been largely attributed to significant employment growth in the agriculture sector. Meanwhile, inflationary pressures have continued to ease, with annual headline and core inflation rates decreasing for the fifth consecutive month, reaching 25.7 percent and 24.4 percent, respectively, in July 2024.

Monetary Policy and Inflation Outlook

The MPC specifically highlighted the substantial decrease in annual food inflation, which fell to 29.7 percent in July 2024, the lowest it has been in nearly two years. This reduction has been instrumental in driving down the overall inflation rate, corroborating the expectation that inflation is on a downward path. This expectation is bolstered by the gradual unwinding of food inflation and the improvement in inflation expectations, signaling a return to more normal monthly inflation dynamics following a period of monetary tightening.

Despite this positive trend, the MPC anticipates inflation to remain around its current levels until Q4 2024, influenced by fiscal consolidation measures already in place and those expected to be implemented. A significant reduction in inflation is projected for Q1 2025, attributed to the cumulative effects of monetary policy tightening and a favorable base effect. However, the MPC also cautioned about potential risks that could disrupt the disinflation path, including tighter global oil supplies, regional geopolitical tensions, the introduction of protectionist trade policies, and a higher-than-expected pass-through from fiscal measures.

In light of these considerations, the MPC concluded that the current policy rates are appropriate for sustaining the tight monetary conditions necessary until a significant and sustained decline in inflation is achieved. "In view of the above and leveraging previous MPC decisions, the Committee judges that current policy rates remain appropriate to maintain the prevailing tight monetary stance until a significant and sustained decline in inflation is realized," the MPC affirmed.