Tightening monetary policy prerequisite for achieving inflation targets of 7% (±2%) in 4Q 2024, 5% (±2%) in 4Q 2026: CBE

Daily News Egypt
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The Central Bank of Egypt (CBE) has said that tightening its monetary policy is a prerequisite for achieving its target inflation rates of 7% (±2%) by the fourth quarter (4Q) of 2024 and 5% (±2%) by 4Q 2026.

The CBE stated that the widespread rise in inflation requires more monetary restraint to contain inflationary pressures from the demand side and avoid secondary effects that may result from supply shocks, in order to control inflationary expectations of prices.

The Monetary Policy Committee (MPC) of the CBE decided to raise the basic return rates at CBE by 2%, to reach 18.25% for deposits, 19.25% for lending, and 18.75% for the credit and discount rate and the price of the main operation at CBE.

The CBE’s decision was widely expected after the jump in the inflation rate in February.

In its statement accompanying this decision, the committee said that at the global level, the severity of global commodity price expectations has decreased compared to the expectations that were presented to it at its previous meeting. It pointed out that despite this, the uncertainty associated with those price expectations persisted, the most important of which is the prospects for imbalances in global supply chains and expectations of global economic activity, especially in light of the reversal of the closure policy associated with the pandemic in China.

It added that these developments were reflected in significant fluctuations in the financial conditions of the US economy and the European Union, which confirms the high levels of uncertainty related to the global economy.

The committee explained that at the local level, the growth rate of real economic activity slowed slightly, to record 3.9% during 4Q 2022 compared to a growth rate of 4.4% during 3Q 2022, and thus the first half of the fiscal year 2022/2023 recorded a growth rate of 4.2%.

According to the committee, detailed data for 3Q 2022 indicate that the growth in real GDP was driven by an improvement in the economic activity of the private sector, especially the sectors of tourism, agriculture, and wholesale and retail trade. In addition, most of the preliminary indicators continued to record positive growth rates during 1Q 2023, pointing out that the GDP growth rate is expected to follow a moderate pace during the fiscal year 2022/2023 compared to the previous fiscal year, to rise again after that.

With regard to the labor market, the committee indicated that the unemployment rate recorded 7.2% during 4Q 2022, compared to a rate of 7.4% during 3Q 2022.

It indicated that the annual rate of general urban inflation continued to rise, to record 25.8% and 31.9% in January and February 2023, respectively, and the annual rate of core inflation recorded 31.2% in January 2023, and reached the highest rate historically recorded in February 2023, recording 40.3%.

It explained that these increases reflect many factors, which include imbalances in supply chains locally, fluctuations in the exchange rate of the Egyptian pound, in addition to pressures from the demand side. This is evident in the developments of real economic activity compared to its maximum production capacity and the rise in the rate of growth of domestic liquidity. The committee explained that the seasonal effect of Ramadan was also reflected on the prices of Umrah trips and the prices of food commodities.

The committee added that it will continue to evaluate the impact of restricting basic interest rates, pointing out that the recent developments in inflation showed a wide rise in consumer price indices, which requires more monetary restraint, not only to contain inflationary pressures from the demand side, but also to avoid the secondary effects that may result from supply shocks, in order to control inflationary expectations of prices.

The committee also stressed the need to restrict monetary policy as a prerequisite for achieving the inflation rates targeted by the CBE, which amount to 7% (±2%) on average in 4Q 2024 and 5% (±2%) on average in 4Q 2026.

It confirmed that it will closely follow all economic developments and will not hesitate to amend its policy in order to achieve the goal of price stability.

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