Press release Extraordinary meeting of the Monetary Policy Committee March 6, 2024

Extraordinary meeting of the Monetary Policy Committee

The local economy has recently been affected by a shortage of foreign currency resources, which has led to the emergence of a parallel market for the exchange rate and a slowdown in economic growth. The external repercussions resulting from global inflationary pressures continued to accumulate as the global economy was exposed to successive shocks. These shocks and their repercussions have led to a rise in uncertainty and inflation expectations, which has increased inflationary pressures. The resulting exchange rate movements, in addition to the rise in global prices of basic commodities, along with local supply shocks, led to continued inflationary pressures, which in turn pushed the general inflation rate to record levels. Although annual inflation rates have slowed recently, they are expected to exceed the target rate announced by the Central Bank of Egypt of 7% (± 2 percentage points) on average during the fourth quarter of 2024.

As part of its keenness to fulfill its role in protecting the requirements of sustainable development, the Central Bank affirms its commitment to maintaining price stability in the medium term. To achieve this, the Central Bank is committed to continuing its efforts to shift towards a flexible inflation targeting framework, by continuing to target inflation as the nominal basis of monetary policy while allowing the exchange rate to be determined according to market mechanisms. Unifying the exchange rate is considered a very important measure, as it contributes to eliminating the accumulation of demand for foreign exchange following the closing of the gap between the official and parallel market exchange rates.

In this regard, and in continuation of the policy of monetary restriction followed by the Central Bank of Egypt, the Monetary Policy Committee decided in its extraordinary meeting to raise the overnight deposit and lending interest rates and the Central Bank’s main operation rate by 600 basis points to reach 27.25%, 28.25% and 27.75%, respectively. Ranking. The credit and discount rates were also raised by 600 basis points to reach 27.75%.

Based on the decision taken by the Committee at its meeting on February 1, 2024, to raise basic interest rates by 200 basis points, the Committee decided to accelerate the monetary restriction process in order to accelerate inflation’s downward path and ensure a decline in monthly inflation rates. The Monetary Policy Committee also emphasizes the importance of controlling inflationary expectations, and what the restrictive policy requires of raising basic interest rates to reach real rates of return to positive levels.

The Central Bank of Egypt also realizes that monetary restrictions could lead to a decline in real credit granted to the private sector in the short term, but rising inflationary pressures pose a greater risk to the stability and competitiveness of the private sector. Therefore, the Central Bank is aware that achieving price stability creates an encouraging climate for investment and sustainable growth for the private sector in the medium term.

The announced monetary policy decisions come within the framework of a comprehensive economic reform package in coordination with the Egyptian government and with the support of bilateral and multilateral partners. In preparation for implementing the reform program measures, the necessary financing was provided to support foreign exchange liquidity. The Central Bank also emphasizes the importance of coordination between financial and monetary policies to limit the impact of external repercussions on the local economy, which puts the Egyptian economy on a sustainable path to maintain macroeconomic stability, ensure debt sustainability, and work to build international reserves.

It is expected that eliminating the parallel foreign exchange market will reduce inflationary expectations and curb inflation. Therefore, headline inflation is expected to follow a downward path in the medium term, after the gradual decline of inflationary pressures associated with exchange rate unification. On the other hand, risks surrounding inflation expectations include regional geopolitical tensions, volatility in global commodity markets and global financial conditions. In light of these aforementioned risks and changes, a re-evaluation of the target inflation rates determined by the Central Bank of Egypt will be clearly announced.

Recognizing that the Monetary Policy Committee’s decisions need time for their impact to be transmitted to the economy, the Committee will continue to evaluate the balance of risks surrounding inflation with the aim of controlling inflationary expectations. The Committee believes that the decision to raise key interest rates by 600 basis points will help tighten monetary conditions in a manner consistent with the targeted path of reducing inflation rates. These levels will be maintained until inflation converges to its desired path.

The Committee stresses the importance of maintaining the path of return rates that limits the deviation of expected inflation from its target rate, as well as the deviation of economic activity from its maximum production capacity. The Committee will also continue to follow all economic developments according to the data received, and will not hesitate to use its available tools to maintain price stability in the medium term. The Committee reiterates that the path of core interest rates depends on expected inflation rates.

monetary policy sector
monetary.policy@cbe.org.eg

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