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Egypt Monetary Policy April 2021

Egypt: Central Bank takes cautious approach and holds rates steady in April

At its monetary policy meeting on 28 April, the Central Bank of Egypt (CBE) held the overnight deposit, overnight lending and main operation rates unchanged at 8.25%, 9.25% and 8.75%, respectively. The decision marked the fourth hold in successive meetings and was in line with market analysts’ expectations.

The Bank’s decision came amid stabilizing inflationary pressures at the beginning of the year, with inflation clocking in at 4.5% in both February and March and thus remaining below the target floor of 5.0%. However, with a hawkish tone of concern, the Bank did note rising international food and oil prices as an upside risk to price trajectories. Nevertheless, with the economic recovery picking up steam—recently released data confirmed the economy grew 2.0% on an annual basis in October–December 2020 (July–September: +0.7% yoy) amid a generally improving external environment—the Bank decided it had sufficient room to leave rates unchanged.

Going forward, the CBE reaffirmed in its release that it “will not hesitate to utilize all available tools to support the recovery of economic activity, within its price stability mandate”.

Regarding the outlook, Jacques Nel, head of Africa Macro at Oxford Economics, sees rates on hold in the short term:

“The MPC statement carried a tone of concern regarding rising food and other commodity prices. As a net importer of staple foodstuffs and oil, the domestic price environment is vulnerable to international price pressures. A more hawkish approach to monetary policy is appropriate, and we expect that the policy rates will remain unchanged for the duration of 2021.”

Conversely, Farouk Soussa and Rositsa Chankova, economists at Goldman Sachs, envisage further cuts ahead:

“Given the benign inflation outlook, we continue to see a strong case for rate cuts in the near term. Real rates remain at historically high levels, and significantly higher than in most emerging markets. We believe high real rates may act as a drag on growth in the medium term and may contribute to an overvaluation of the EGP which could hinder competitiveness in the longer term. We also see a fiscal case for lower real rates, which we believe would improve debt sustainability dynamics. In our view, the CBE’s hawkish stance mainly reflects uncertainties regarding the external outlook. […] However, we are bullish on the prospects for a global recovery this year and, combined with continued positive news flow from Egypt, believe this should alleviate external constraints and allow the CBE to cut rates, possibly in their next meeting in June.”

The next monetary policy meeting is set for 17 June.

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