Egypt: Central Bank surprises markets again by holding fire in September
At its 22 September monetary policy meeting, the Central Bank of Egypt (CBE) decided to maintain all of its rates unchanged once again, mirroring its June and August decisions. As a result, the overnight deposit, the overnight lending and main operations rates remained at 11.25%, 12.25% and 11.75%, respectively. The move took analysts by surprise; markets had priced in a 100 basis point increase. That said, the CBE raise the required foreign reserve ratio to 18.00%, up from 14.00%.
The surprise decision was driven by the Bank’s assessment that the continued accelerations of headline and core inflation in August were driven by supply-side issues, stemming chiefly from volatile commodity prices. As such, the Bank of Egypt concluded that “the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term”. The Bank is now taking a wait-and-see approach, assessing the impact of the cumulative 300 basis points hikes on the economy.
With regards to activity, the Bank’s second national accounts release for the final quarter of FY 2022 (July 2021–June 2022) cited a preliminary 3.2% GDP expansion in annual terms in April–June, markedly up from the initial estimate of 1.3%. Consequently, GDP will have grown 6.6% in FY 2022, up from the initial estimate of 6.2%. However, the CBE noted it sees spillovers from the war in Ukraine and heightened global uncertainty slowing down activity.
The CBE did not provide explicit guidance regarding future policy moves. It stated, however, that “the elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s pre-announced target of 7 percent (±2 percentage points) on average in 2022 Q4”. Meanwhile, the Bank asserted that “the path of future policy rates remains a function of inflation expectations, rather than of prevailing inflation rates”.
The next monetary policy meeting is set for 3 November.