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Egypt Monetary Policy June 2021

Egypt: Central Bank holds rates steady in June

At its monetary policy meeting on 17 June, the Central Bank of Egypt (CBE) kept the overnight deposit, overnight lending and main operation rates unchanged at 8.25%, 9.25% and 8.75%, respectively. The decision marked the fifth hold in successive meetings and was in line with market analysts’ expectations.

The Bank’s decision came amid relatively mild inflationary pressures at the beginning of the year, with inflation clocking in at 4.8% in May (April: 4.1%) and thus remaining below the target floor of 5.0%. The hold also came amid an accelerating economic recovery, with preliminary data indicating 2.9% growth on an annual basis in January–March 2021 (October–December 2020: +2.0% yoy), and accommodative global economic and financial conditions—all of which likely gave the Bank further 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”. The majority of panelists see rates staying on hold until the end of 2021, although a small number see potential for between 50–100 basis points of further cuts.

Regarding the outlook, Jacques Nel, head of Africa macro at Oxford Economics, sees rates on hold this year and through 2022:

“With economic growth this year largely reflective of base effects and government support, our baseline inflation forecast is underpinned by the assumption that bottleneck inflation will remain largely absent this year. With core price inflation remaining in the sub-4% range, we anticipate that monetary authorities will keep benchmark interest rates at current levels for the period through end-2022.”

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

“We continue to see a case for rate cuts in the medium term. Real rates in Egypt remain at historically high levels, and significantly higher than in most emerging markets. We think this acts as a drag on growth in the medium term and may contribute to an overvaluation of the EGP which risks hindering competitiveness in the longer term. We also see a fiscal case for lower real rates, which we believe would improve debt sustainability dynamics.”

The next monetary policy meeting is set for 5 August.

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