Egypt’s central bank lowered its key interest rates for the third time this year as underlying inflationary pressures continue to ease, with the recent easing providing “appropriate” support to economic activity while remaining consistent with achieving the inflation target.
The Central Bank of Egypt (CBE) cut its overnight deposit rate, the overnight lending rate, the rate on its main operation and the discount rate by 100 basis points each to 12.25 percent, 13.25 percent, 12.75 percent and 12.75 percent, respectively.
CBE has now cut its benchmark overnight rate by 450 basis points this year following earlier cuts in February, August and September. Since February 2018 the rate has been cut by 650 points when it moved into an easing cycle in response to slowing inflation.
Egypt’s inflation rate dropped to 3.1 percent in October, the lowest since December 2005 according to Reuters, from 4.8 percent in September, cementing expectations of today’s rate cut.
Inflation surged to 33 percent in July 2017 after the Egyptian pound was floated in November 2016 as part of a $12 billion agreement with the International Monetary Fund (IMF) that included a rollback of fuel subsidies and the introduction of value-added-tax.
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CBE said its rate cuts were consistent with reaching the inflation target of 9.0 percent, plus/minus 3 percentage points, in the fourth quarter of 2020.
The fall in inflation was driven by lower food prices along with favorable base effects from a transistor shock to fresh vegetable prices last year.
Egypt’s economy was hard hit by the Arab Spring in 2011 but has been steadily improving since 2016 and CBE said growth had stabilized, with gross domestic product rising 5.6 percent in the third quarter of this year, down from 5.7 percent in the second quarter but steady from 5.6 percent in the first quarter.
“The Monetary Policy Committee (MPC) decided to cut the Central Bank of Egypt’s (CBE) overnight deposit rate, overnight lending rate, and the rate of the main operation by 100 basis points to 12.25 percent, 13.25 percent, and 12.75 percent, respectively. The discount rate was also cut by 100 basis points to 12.75 percent.
Annual headline inflation continued to decline to record 4.8 percent in September 2019 and 3.1 percent in October 2019, the lowest rate since December 2005. The decline was driven by lower annual food inflation, supported by favorable base effects stemming from the transitory shock to prices of fresh vegetables in the previous year, while annual non-food inflation inched up in October 2019 due to relatively higher services prices. The decline was further affected by the release of the 10th CPI series as well as its linking methodology with the 9th CPI series.
The decline of annual food inflation was mostly driven by fresh vegetables. Accordingly, higher annual non-food inflation led annual core inflation to increase slightly to 2.7 percent in October 2019 from 2.6 percent in September 2019, the lowest rate since April 2006.
Real GDP growth stabilized, recording a preliminary estimate of 5.6 percent in 2019 Q3, after recording 5.6 percent in fiscal year 2018/19, the highest growth since fiscal year 2007/08. The contribution of real output growth by the private sector witnessed a broad-based increase in 2019 Q2 for the first time since 2017 Q2, and real private demand growth has been picking up to support the stability of real aggregate demand growth.
Employment rose, contributing favorably to the continued decline of the unemployment rate to 7.5 percent in 2019 Q2, thereby narrowing by almost 6 percentage points from its peak in 2013 Q4.
Globally, the expansion of economic activity continued to weaken, financial conditions eased, and uncertainty regarding trade policies continued to weigh on the outlook. Meanwhile, international oil prices remain subject to volatility due to potential supply-side factors that include geopolitical risks.
Incoming data continued to confirm the moderation of underlying inflationary pressures, notwithstanding the expected impact of unfavorable base effects on near-term inflation rates due to the reversal of the transitory shock to prices of fresh vegetables in the previous year. Accordingly, the MPC decided to cut key policy rates by 100 basis points.
The MPC closely monitors all economic developments and will not hesitate to adjust its stance to preserve monetary stability.”
www.CentralBankNews.info
