CBE Reveals Reasons for Interest Rate Hike in Fifth Meeting of 2023

The Central Bank of Egypt has unveiled the factors behind the increase in interest rates during a meeting of the Monetary Policy Committee, marking the second rate hike in 2023.

According to the Monetary Policy Committee report, global expectations for commodity prices continued to decline compared to the projections presented during its June 2023 meeting. In contrast, actual petroleum prices rose in the past month.

Expectations for inflation rates in some major economies also decreased despite remaining above target levels.

Simultaneously, projections for global economic activity have risen compared to those presented in the committee's previous meeting.

The report indicates that the main interest rates are expected to remain elevated due to the persistence of global inflation rates exceeding the target levels. This aligns with the general trend of global financial conditions being constrained.

On the domestic front, the report reveals that the real economic activity growth rate remained unchanged at 3.9% during the first quarter of 2023 compared to the fourth quarter of 2022.

Preliminary data for the first quarter of 2023 indicates that economic activity was driven by positive contributions from the tourism, agriculture, construction, and building sectors.

The report forecasts a slowdown in the Gross Domestic Product growth rate during the fiscal year 2022/2023 compared to the previous fiscal year. However, it is expected to gradually recover in the medium term, consistent with early indicators for the second quarter of 2023.

Regarding the job market, the report discloses that the unemployment rate decreased to 7.1% during the first quarter of 2023, down from 7.2% in the previous quarter. This decrease is primarily attributed to an increase in the number of employed individuals.

The annual general inflation rate in urban areas increased to 35.7% in June 2023 from 32.7% in May 2023, while the annual core inflation rate rose to 41.0% in June 2023 from 40.3% in May 2023. This was driven by a widespread rise in the prices of most consumer goods, attributed to ongoing supply shocks.

Given the aforementioned context and considering the surrounding inflation risks, the Monetary Policy Committee has decided to raise the key yield rates by 100 basis points at the central bank. This move aims to mitigate inflationary pressures and control inflation expectations.

The committee expects inflation rates to peak in the second half of 2023 before gradually receding towards the targeted and previously announced inflation rates. This will be supported by restrictive monetary policies thus far.

The committee emphasizes that the trajectory of key interest rates is contingent upon expected inflation rates rather than prevailing inflation rates.

The committee will continue to monitor economic developments and forecasts in the upcoming period, and will not hesitate to utilize all available monetary policy tools in order to maintain restrictive monetary conditions and achieve the targeted inflation rates of 7% (± 2 percentage points) on average during the fourth quarter of 2024, and 5% (± 2 percentage points) on average during the fourth quarter of 2026.