The Central Bank of Egypt (CBE) has set a new, realistic target for inflation until the end of 2026, taking into consideration current market developments locally and globally.
The CBE set Thursday night a new inflation target of 7% (±2%) until the fourth quarter (4Q) of 2024, and 5% (±2%) in 4Q 2026.
Earlier this month, the Central Bank revealed that the annual core inflation rate had risen to 21.5% in November 2022, compared to 19% in October 2022.
The monthly core inflation rate recorded 2.7% in November 2022, compared to 0.5% in November 2021, and 3% in October 2022.
The Central Agency for Public Mobilization and Statistics (CAPMAS) also revealed that the urban inflation rose to 18.7% in November 2022, compared to 16.2% in October 2022.
According to the agency, the annual inflation rate for the whole country recorded 19.2% in November 2022, compared to 16.3% in October 2022, and 6.2% in November 2021.
Meanwhile, the CBE’s Monetary Policy Committee’s (MPC) decided last Thursday to raise the basic return rates at the Central Bank by 3% to 16.25% for deposits, 17.25% for lending, and 16.75% for the credit and discount rates, and the price of the main operation at the Central Bank.
The MPC said, in a statement, that this decision aims to contain inflationary pressures and achieve targeted inflation rates.
The committee stated that the global commodity price expectations declined slightly, compared to its previous meeting, and global financial conditions tended towards stability, with many central banks abroad referring to the possibility of inflation rates reaching unprecedented levels and a downward trajectory.
It indicated that with these developments, many factors still contribute to the continuation of the state of uncertainty associated with the expectations of global commodity prices, the most important of which is the expected slowdown in global economic activity, the easing of precautionary measures related to the Coronavirus epidemic in China, and the continuation of the state of uncertainty as a result of the Russian-Ukrainian crisis. and its impact on the outlook for global supply chains.
At the local level, the committee said that the preliminary data indicates a recovery in economic activity during the third quarter of 2022, as the real gross domestic product recorded a growth rate of 4.4%, compared to an average of 3.3% during 2Q 2022, pointing out that the growth in the gross domestic product was driven by the positive contribution of the sectors of agriculture, wholesale and retail trade, and tourism. Most of the preliminary indicators continued to record positive growth rates in 4Q 2022, while the unemployment rate recorded 7.4% during 3Q 2022, compared to 7.2% in 2Q.
The committee said that the annual rate of general urban inflation continued to rise further in 4Q 2022, recording 18.7% in November 2022, the highest rate since December 2017. Likewise, the annual rate of core inflation continued to rise for more than a year, recording 21.5% in November 2022, which is the highest rate since November 2017.
The MPC explained that the inflation rate in November 2022 was affected by the depreciation of the Egyptian pound during October 2022, and the increase in the money supply, in addition to the continuing negative effects resulting from the outbreak of the Russian-Ukrainian war.
It said that the annual inflation rate of food commodities was mainly driven by the high inflation rate of basic food commodities. Since the beginning of 2022, while the increase in the inflation rate of services since the beginning of 2022 was mainly driven by the increase in the prices of cafes and restaurants services, while the items of the consumer goods group witnessed a widespread increase during the same period.
According to the Committee, as a result of these developments, the annual general urban inflation rate is expected to exceed its previously announced target level by CBE to be 7% (±2%) on average in 4Q 2022.
The Committee pointed out to the increase in inflationary pressures on the demand side in recent times, which was reflected in the development of real economic activity compared to the maximum production capacity, and in the rise in prices of many items of the consumer price index, and in the increase in the growth rates of domestic liquidity.
It explained that the new inflation targets affirms CBE’s commitment to achieving price stability in the medium term, and comes in parallel with the central bank’s previous announcement of targeting inflation rates on a downward path.
It stressed that the future path of inflation rates depends on the cumulative increases in interest rates to date, which takes time to affect inflation rates.
According to the committee, it closely follows global and domestic economic developments, and will continue to use all its monetary tools in order to control inflation expectations and contain inflationary pressures from the demand side, and the secondary effects of supply shocks, which may lead to a deviation of inflation from its target rates.
It affirmed that the course of the basic rates of return depends on expected inflation rates and not the prevailing inflation rates, and that it will continue to strive towards achieving the goal of price stability.
It is noteworthy that the MPC held eight meetings during the year 2022, during which interest rates increased by about 8%, including 1% on March 21, 2% on May 19, and 2% during the extraordinary meeting held by the Committee on October 27, which accompanied the decision to work at the flexible exchange rate, and finally the 3% approved by the bank on Thursday.
Tarek Metwally, former vice president of BLOM Bank Egypt, said that raising interest by the Central Bank was necessary in light of the high inflation rates reaching 21.5%, the instability of the currency exchange market, the depreciation of the Egyptian pound against the dollar, and the trend towards diversified investments such as gold, commodities, and real estate. It was necessary to work to restore the attractiveness of the Egyptian pound again by raising interest, in addition to issuing a short-term savings container with an attractive return for dollar holders to sell their hard currency.
Metwally indicated that there is no doubt that the central bank is currently trying to attract more liquidity within the banking sector, and reduce speculation on the dollar, which requires several steps that must be taken without isolating one from the other, and there is no doubt that it is within the agenda of the central priorities in a sequence of extent Implementation capacity.
He added that a package of measures must be taken in addition to raising the interest rate to eliminate the parallel market, which is the main cause of the current wave of inflation, and without that there will be no stability in prices, stressing the importance of taking these decisions simultaneously to restore confidence in the pound and limit its rise. Inflation and market stability.