CBE maintains policy rates and extends inflation targets

Updated 12/27/2024 8:35:00 AM

Arab Finance: The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE), during their last meeting in 2024, opted to maintain key interest rates at their current levels, as per a statement issued on Thursday, December 26th.

The overnight deposit rate remains at 27.25%, the overnight lending rate at 28.25%, and the main operation rate at 27.75%. Similarly, the discount rate was left unchanged at 27.75%.

In addition, the MPC also decided to extend its inflation target horizons to the fourth quarter of 2026 and 2028.

It set the targets at 7% (±2 percentage points) and 5% (±2 percentage points) on average, respectively.

This move is in line with the CBE’s gradual shift towards a comprehensive inflation-targeting framework.

Globally, central banks have begun to reduce policy rates as inflation eases, though they continue to adopt a cautious stance to ensure inflation converges to their target levels.

Inflation in advanced and emerging economies has begun to moderate after a prolonged period of increases, though it remains above target levels.

In Egypt, headline inflation has recently declined but continues to exceed targets.

The inflation rate is projected to average 26% in the fourth quarter (Q4) of 2024, missing the CBE’s target range of 7% (±2 percentage points).

This deviation is attributed to a combination of external and domestic factors over the past two years, including global food price surges, imported inflation, capital outflows following the Russia-Ukraine conflict, domestic market distortions, and unanchored inflation expectations.

Fiscal consolidation measures, aimed at reducing deficits and controlling public debt, have also contributed to inflationary pressures.

Exchange rate depreciation further amplified these effects, with annual headline inflation peaking at 38% in September 2023 before declining to 25.5% in November 2024.

Despite recent declines, risks to the inflation outlook remain, including the potential escalation of geopolitical tensions, a resurgence of protectionist trade policies, and the higher-than-expected impact of fiscal measures.

However, inflation is expected to ease significantly in 2025, supported by the cumulative effects of monetary policy tightening and a favorable base effect.

A marked decline is anticipated in the first quarter (Q1) of 2025, with inflation potentially reaching single digits by the second half (H2) of 2026.

The MPC considers the extension of inflation targets appropriate, allowing for greater flexibility in addressing price shocks without imposing additional stringent measures that could hinder economic growth.

Current policy rates are seen as sufficient to maintain a restrictive stance until inflation shows a significant and sustained decline and inflation expectations are firmly anchored.

The committee reaffirmed its commitment to a data-driven approach, noting that policy adjustments will be assessed on a meeting-by-meeting basis.

It also emphasized its readiness to utilize all available tools to address inflationary pressures and achieve its targets while maintaining economic stability.