Egypt: Central Bank maintains key rates unchanged at August meeting
At its monetary policy meeting on 13 August, the Central Bank of Egypt (CBE) maintained the overnight deposit, overnight lending, and main operation rates unchanged at 9.25%, 10.25% and 9.75%, respectively, as expected by most market analysts.
The decision to stand pat in August continued the Bank’s wait-and-see approach, following 300 basis points of rate cuts in March as the coronavirus pandemic and related containment measures hit economic activity. Preliminary data for FY 2020 (July 2019–June 2020) indicates that GDP growth slowed to 3.8%, the lowest outturn in 6 years and suggesting a mild contraction for the final quarter of the fiscal year (April–June). However, the Bank reported that “a number of leading indicators started showing signs of recovery in June and July 2020, in tandem with the easing of the containment measures”. This, combined with heightened uncertainty regarding the global recovery from the pandemic, drove the decision to keep rates on hold, despite inflation remaining well below the Bank’s 6.0–12.0% target range.
Regarding the CBE’s decision, Callee Davis, an economist at Oxford Economics, commented:
“Although July’s low inflation print may have given the Central Bank of Egypt (CBE) scope to cut key policy rates even further at its most recent meeting on August 13, they were held steady, as the CBE likely sought to benefit from improved investor sentiment provided by higher real interest rates – a low inflation print in July left Egypt with one of the highest real interest rates in the world (at around 5.5%).”
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”.
Considering the outlook, Farouk Soussa and Shuchita Shukla, economists at Goldman Sachs, noted:
“While the persistent disinflationary trend observed over the first half of the year and below target inflation outlook (both ours and the CBE’s) over the remainder of the year open up room for another cut by end-2020, we expect the CBE to remain in wait-and-see mode amid “ongoing high level of global uncertainty” – a major concern for the Committee as highlighted clearly in today’s press release. Our base case is for the CBE to stay on hold at +9.25% for the time being, until its assessment of the global outlook improves.”
The next monetary policy meeting is set for 24 September.