Keeping policy rates unchanged remains consistent with 7% (±2%) inflation target: CBE

Hossam Mounir
6 Min Read

The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) has decided to maintain its main policy rate unchanged in 2021 to date. This comes after the MPC cut key policy rates by a total of 400 bps in 2020 to support economic activity in light of the global and domestic developments stemming from the COVID-19 pandemic.

In the meantime, the CBE continues to support macroeconomic stability over the medium term, keeping policy rates unchanged and remaining consistent with achieving the CBE’s inflation target of 7% (±2%) on average during the fourth quarter (4Q) of 2022.

Global economic activity continues to recover from the COVID-19 pandemic, although growth remains uneven across regions, as some countries are yet to contain the spread of the virus. Prospects for global economic recovery remain contingent on the scale of distribution, as well as the efficacy of vaccines. Meanwhile, global financial conditions continued to remain accommodative and supportive of economic activity over the medium term, as part of wide-spread efforts to boost the global economy.

Over the medium term, Egypt’s GDP growth is forecasted to follow a better than previously expected recovery trajectory, assuming a continued ease in the degree of uncertainty surrounding the pandemic and its impact on economic activity.

International food price forecasts relevant to Egypt’s consumption basket are expected to continue to increase in 4Q 2021 and in 2022. In addition, the outlook for Brent crude oil prices incorporated in the domestic inflation outlook increased relative to the previous Monetary Policy Report. As such, Brent crude oil prices continue to pose upside risks to the inflation outlook, as they continue to be affected by global supply shortages, the constrained output by OPEC+, in addition to higher global demand.

Domestically, as cost-recovery for most fuel products has already been achieved, the pass-through of international oil prices to domestic inflation will be based on the quarterly review of the fuel prices as part of the price indexation mechanism, which caps the price adjustments to domestic fuel prices to ±10% every quarter.

Egypt’s Fuel Automatic Pricing Committee decided to raise fuel prices by EGP 0.25 per litre in July 2021 for the second consecutive quarter, in line with the increase in international oil prices.

Upside risks to the baseline inflation outlook mainly stem from higher than projected pass through of international commodity prices to domestic inflation as well as faster than projected economic recovery domestically and globally. This could lead to earlier monetary policy normalization globally which could be a source of volatility in global financial markets.

Meanwhile, downside risks to the baseline inflation outlook mainly stem from the lower than projected domestic food inflation rates in 2021 and 2022, which could lead to tighter than projected monetary conditions given the target achievement horizon.

In addition, low and/or uneven vaccination rates as well as the possible spread of new strains globally still pose uncertainty around the outlook.

Moreover, capital flows into emerging markets continued to broadly increase following the sharp slump in March 2020, but slightly declined during the months of July and August.

The continued rollout and development of vaccines is expected to support global economic recovery. This, coupled with the accommodative global financial conditions, has supported the resumption of inflows into emerging market economies.

Meanwhile, yields on Egyptian Eurobonds have been broadly stabilized in August 2021 after inching up in July 2021. Moreover, Egypt’s CDS spreads remained relatively stable since February 2021 notwithstanding the recent in-crease in April 2021. Furthermore, Egypt’s CDS spreads remained relatively low compared to the majority of peers with similar sovereign credit ratings. Furthermore, Moody’s, Fitch Ratings, and S&P have reaffirmed their current credit rating for Egypt while maintaining a ‘stable’ outlook in July 2021, March 2021, and April 2020, respectively. It is noteworthy to highlight that Egypt’s credit rating was upgraded by Moody’s and Fitch Ratings in April and March 2019, respectively, following the up-grade by S&P in May 2018.

In the banking sector, data until July 2021 continued to reflect partial transmission of the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020 to rates of new deposits. New deposit rates declined to record 8.4% in July 2021 compared to an average of 9.5% recorded during December 2019, January 2020, and February 2020. This reflects a transmission in the magnitude of 0.3x the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020. Meanwhile, rates of new loans declined to record an average of 11.3% in July 2021 compared to an average of 11.7% and 15.1% during 1Q 2021 and December 2019, January 2020 and February 2020, respectively. This reflects a transmission in the magnitude of 1.0x the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020. The decline was also supported by the CBE initiatives.

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