Egypt: Central Bank leaves overnight deposit rate unchanged at multi-year high in September
September 22, 2016
The Central Bank of Egypt (CBE) unexpectedly left all rates unchanged at its meeting on 22 September. The decision came as a surprise to an overwhelming majority of market participants, who had expected the Bank to increase rates in an effort to curb soaring inflation. As a result, the overnight deposit rate rests at a multi-year high of 11.75%, the overnight lending rate at 12.75% and the main operation rate at 12.25%. The Bank argued that it kept the rates at their current levels in light of “transitory cost-push factors, while demand-side factors continue to pose downside risks to the inflation outlook”. The Bank has hiked interest rates by a cumulative 250 basis points this year so far in order to rein in surging inflation, following a surprise devaluation of the Egyptian pound in March. Despite the Bank’s decision to maintain rates unchanged this month, growing speculation about another currency devaluation, lower electricity subsidies and a new value-added tax are fueling market concerns that consumer prices will increase even further. The Bank, which is committed to adjusting the key rates in order to ensure price stability, would likely increase the three main rates if concerns over rising inflation were to materialize.
Regarding price developments, the Bank noted that both headline and core inflation had risen markedly in August. According to the Bank, higher prices for regulated items—notably electricity, as a result of scrapping electricity subsidies—and food products were behind August’s inflation reading. The Central Bank considered that, in August, “the pass-through of previous exchange rate movements to domestic prices […] remained limited.”
As for economic growth, the Bank stated that Egypt’s GDP expanded an annual 4.3% in the period from July 2015 to March of this year, down from the 4.8% increase recorded during the same period last year. In terms of expenditure, the expansion was fueled by domestic demand, where both household and government consumption growth more than offset lackluster levels of investment. Sector-wise, economic activity was mainly driven by services—despite the slump of tourism revenues. Nonetheless, the expansion was partially muted by subdued performance in the industrial sector, the result of severe weaknesses in mining activities.
The Central Bank reaffirmed its commitment to a price stability mandate and said that it will follow the impact of economic developments—especially changes in fiscal policy—on the inflation outlook closely. The next monetary policy meeting is scheduled for 17 November.
Author: David Ampudia, Economist