Egypt: Overnight deposit rate steady at multi-year high in November
November 17, 2016
The Central Bank of Egypt (CBE) left all rates unchanged at its meeting on 17 November, after increasing them by 300 basis points at an extraordinary meeting on 3 November in an attempt to offset effects related to the free floating of the Egyptian pound on the same day. The overnight deposit rate currently rests at a multi-year high of 14.75%, the overnight lending rate at 15.75% and the main operation rate at 15.25%. The Bank has hiked interest rates by a cumulative 550 basis points this year so far in order to rein in surging inflation.
Although headline inflation eased in October from September’s reading, the CBE attributed this largely to a favorable base effect and volatility in food prices. However, the effects of painful economic reforms on the economy were reflected in the print for core inflation. The index jumped on the back of the introduction of a value-added tax and the scrapping of subsidies for electricity and fuel.
Regarding economic growth, the Bank stated that Egypt’s GDP expanded an annual 4.3% in fiscal year 2015/16, which runs from July 2015 to June 2016. This was slightly below the 4.4% increase recorded during the previous fiscal year. Although the Bank provided no breakdown by components, the expansion is likely to have been fueled by domestic demand, with both household and government consumption growth more than offsetting lackluster levels of investment. Sector-wise, economic activity appears to have been driven by services—despite the slump of tourism revenues. The rate of unemployment narrowed to 12.5% in the last quarter of the fiscal year, pointing to improved competitiveness on the back of lower real unit labor costs relative to productivity. The CB noted, however, that the rate has inched up in the first quarter of FY 2016/17.
The Central Bank reaffirmed its commitment to a price stability mandate and said that it will follow the impact of economic and monetary developments on the inflation outlook closely. The next monetary policy meeting is scheduled for 29 December.
Author: David Ampudia, Economist