Cityscape in Egypt

Egypt Monetary Policy September 2020

Egypt: Central Bank cuts rates by 50 basis points at September meeting

At its monetary policy meeting on 24 September, the Central Bank of Egypt (CBE) cut the overnight deposit, overnight lending and main operation rates by 50 basis points each, to 8.75%, 9.75% and 9.25% respectively. The move was the first cut since March’s 300-basis-point reduction and came against the expectations of market analysts, the majority of whom had envisaged rates being held steady for another session.

The decision to cut rates reflected a policy shift toward prioritizing domestic activity over external-sector demands. High real rates had been driving capital inflows, bolstering foreign reserves since June, but August’s muted inflation reading of 3.4% gave the Bank additional room to ease its policy. Furthermore, the CBE downgraded its preliminary GDP estimate for FY 2020 (July 2019–June 2020), indicating that growth slowed to 3.5%—lower than the 3.8% estimate in August’s update and the lowest outturn in 6 years—which suggests a mild contraction for the final quarter of the fiscal year (April–June).

Looking ahead, the CBE stated in its communiqué that it would “closely monitor all economic developments and will not hesitate to utilize all available tools to support the recovery of economic activity, within its price stability mandate”.

Regarding the CBE’s decision, Farouk Soussa, economist at Goldman Sachs, noted:

“The cut is […] consistent with broader macro objectives, including aiding the otherwise weak near-term growth outlook, providing support to public finances and reducing the upward pressure on the EGP (which continues to be a concern for long-term external competitiveness). […] We do not believe that today’s decision will have a negative impact on inflows. Despite the cut, Egypt’s real rates and yields remain high relative to wider EM, while the country’s macro stability has been buttressed by support from the IMF.”

Commenting on the outlook, Carla Slim, economist at Standard Chartered Bank, sees no further cuts this year:

“The Monetary Policy Committee (MPC) press release reiterated that the CBE expects inflation to average c.6% y/y in Q42020. As such, we lower our 2020 year-end policy rate forecast to 8.75% to account for today’s decision. We now expect the CBE to remain on hold, barring further downside surprises to inflation.”

The next monetary policy meeting is set for 12 November.

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