The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to maintain its main policy rates unchanged in all of the meetings it held in 2021.
This comes after the MPC cut key policy rates by a cumulative of 400 bps in 2020 to support economic activity in light of the global and domestic developments stemming from the outbreak of the coronavirus pandemic.
In the meantime, and as the CBE continues to support macroeconomic stability over the medium term, keeping policy rates unchanged during the aforementioned meetings remains consistent with achieving the CBE’s next inflation target of 7% (±2%) on average during 4Q of 2022.
The cut-off date for the data included in this report is 15 November 2021. Some of the data presented is preliminary or subject to revisions. There has been new incoming data since the cut-off date, including, but not limited to, the release of the inflation statistics for November 2021.
Furthermore, the MPC decided in its meetings that were held on 28 October and 16 December 2021 to keep its key policy rates unchanged. These and all other incoming data will be incorporated in the following Monetary Policy Report.
Additionally, the global economy continues to deal with the outbreak of the coronavirus pandemic, with recovery remaining uneven across regions and showing some signs of slowdown due to global supply disruptions. Prospects of global economic recovery are broadly a function of stimulative measures and contingent on the efficacy of vaccines and the ability of countries to contain the spread of the virus in light of the emergence of newer variants.
Global financial conditions continue to be accommodative and supportive of economic activity over the medium term, however, although more and more central banks are opting to end their quantitative easing.
Domestic economic activity is expected to record robust growth figures in the short-term, mainly driven by domestic demand, and in specific, gross domestic investments.
Additionally, real GDP growth will continue to be partially impacted by a positive base-effect up until 4Q of 2021. Over the medium term, Egypt’s real 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 have continued to increase, driven by both demand and supply-side factors globally.
Furthermore, the outlook for Brent crude oil prices incorporated in the domestic inflation outlook increased relative to the previous Monetary Policy Report. Nonetheless, Brent crude oil prices continue to pose upside risks to the inflation outlook, as they continue to be affected by 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 during its meeting in October 2021 for the third consecutive review, in line with the increase in international oil prices. Moreover, prices domestically were impacted by the pass-through of higher global commodity prices via higher regulated prices as officially announced by the government.
For instance, (i) domestic natural gas prices for cars, households, and industrial use — including iron, steel plants, fertilisers, and petrochemical industries — have increased, which comes along the increase of global gas prices. (ii)
Furthermore, the Ministry of Supply and Internal Trade announced higher prices of subsidised vegetable oil, which is expected to be reflected in November 2021 inflation. (iii)
Finally, the Ministry of Agriculture announced the increase of subsidised prices of fertilisers, which increases the input costs of food production.
“In the near term, annual headline inflation is expected to increase in line with the return to normalcy in economic activity,” the report said.
However, annual headline inflation is expected to remain consistent with the CBE’s target of 7% (±2%) on average in 4Q of 2022. Upside risks to the inflation outlook mainly stem from pass-through of higher than projected international commodity prices to domestic inflation and possible subsequent fiscal consolidation measures.
Furthermore, a faster-than-projected pick-up in economic activity both domestically and globally is another inflationary risk. Downside risks mainly stem from the lower than projected domestic food inflation rates in 2022, which could lead to tighter than projected monetary conditions given the target achievement horizon.
Additionally, low and/or uneven vaccination rates as well as the possible spread of new strains globally still pose uncertainty around the outlook.”
Prospects for global economic recovery have continued to exhibit a positive trend in 3Q of 2021, as progress with vaccination rollout and the accommodative financial conditions continue to support economic activity and restore market confidence.
However, the pace of economic recovery remains uneven across regions and economic sectors.
Global growth weighted by Egypt’s external environment expanded by 4.5% in 3Q of 2021 after increasing by 14.4% in the previous quarter. It was also supported by a weaker albeit still favourable base effect.
The decline in economic growth compared to 2Q of 2021 was mainly attributed to the corresponding decline in advanced economies growth to record 3% in the same quarter compared to 10.6% in 2Q of 2021, which in turn was attributed to a broad-based decline in the growth of the US, EU, Japan, and the UK.
Similarly, emerging economies exhibited broad-based growth for the third consecutive quarter, albeit at lower rates, dropping from 3.5% in 2Q of 2021 to 1.5% in 3Q of 2021 due to a broad-based decline in China, India, Russia, and Brazil in the same period compared to 2Q of 2021.
Moreover, global trade recorded a growth rate of 7.4% in 3Q of 2021 compared to 21.2% in the previous quarter. This followed a growth trend of the previous two quarters and is supported by a favourable base effect.
However, supply chain bottlenecks continue to raise concerns over the future of global trade.
Annual headline inflation of Egypt’s external environment continued to increase in 3Q of 2021, recording an annual inflation rate of 3.5%, compared to 2.8% and 1.6% in 2Q of 2021 and 1Q of 2021, respectively.
Inflation in advanced economies also increased to 3.2% in 3Q of 2021 from 2.3% in 2Q of 2021, driven by higher inflation registered in the US, UK, and EU, which more than offset the continued deflation in Japan. Similarly, inflation in emerging market economies rose to 4.2% in 3Q of 2021 compared to 4.0% in the preceding quarter, with broad-based acceleration of inflation in Russia and Brazil.
Meanwhile, inflation rates in China and India dropped marginally. While this inflation was expected to be transitory, higher energy prices and supply chain shocks have raised concerns over persistent inflationary pressures. Brent crude oil prices have risen on average over twelve consecutive months since October 2020 (except for April 2021).
However, oil prices slumped during the last week of November, registering $70.6 per barrel, compared to $84.4 per barrel at the end of October 2021. The recent increases in September, October, and up until the last week of November were driven by both demand and supply side factors, with more weight given to supply side factors.
Demand for petroleum products has increased in the wake of the post-COVID-19 economic recovery, as well as the EU natural gas shortage, while US oil production has been impacted by hurricane Ida, affecting global supply.
However, the recent emergence of the Omicron variant and corresponding vaccine uncertainties have resulted in speculation over oil demand and a drop in oil prices. Similarly, expectations of the release of emergency reserves by several countries, including the US, China, India, Japan, UK, and the Republic of Korea have eased the rising pressures on oil prices.
In the meantime, international food prices using domestic CPI basket weights of core food items rose sharply on an annual basis since April 2020. Despite a marginal decline in 2Q of 2021, food prices have been increasing on an annual basis until November 2021.
The US Federal Reserve decided to maintain its policy rates at their current levels of 0% and 0.25% during its last meeting, after having cut rates by 150 bps in March 2020.
It also announced that it will accelerate the tapering of its asset purchase programme, reducing the monthly pace of net asset purchases by $20 billion for treasury securities and $10 billion for agency mortgage-backed securities.
However, the pace of monthly purchases is subject to change based on the economic outlook. The Federal Reserve also signalled that it will potentially end its asset purchase programme in March 2022 to be followed by three potential policy rate hikes.
Similarly, the European Central Bank also kept its main refinancing operations rate and deposit facility rates unchanged at 0% and negative 0.5% in its last meeting, both of which were last changed in March 2016 and September 2019, respectively.
Additionally, the bank announced that it will lower the pace of net asset purchases under the pandemic emergency purchase programme (PEPP) over the coming quarter, discontinuing them at the end of March 2022, given the favourable assessment of economic recovery and the inflation outlook.
Moreover, the Bank of England raised its main policy rates during its last meeting by 15 basis points to 0.25, after cutting it by 65 bps to 0.1% in March 2020. With regards to quantitative easing, it also pledged to continue with its existing government bond purchases. Additionally, the bank signalled a positive inflation outlook attributed to global inflationary pressures, including rising energy prices and supply shortages.
Moreover, capital flows into emerging markets continued to broadly increase following the sharp slump in March 20201 due to the pandemic but started to slightly decline since July 2021.