Egypt cuts rate 2nd time in 2020, inflation below target

     Egypt's central bank cut its key interest rates for the second time this year, saying recent data showed inflation expectations were declining so a reduction in the policy rate would support economic activity while still remaining consistent with achieving price stability.

     The Central Bank of Egypt (CBE) cut its overnight deposit rate, its overnight lending rate and the rate on its main operation by 50 basis points each to 8.75 percent, 9.75 percent and 9.25 percent, respectively.

     The discount rate was cut 50 basis points to 9.25 percent.

     It is CBE's second rate cut this year after a 300 basis-point cut at an unscheduled monetary policy meeting on March 16 with the result that rates have been cut by a total of 350 basis points this year.

     Since February 2018, when CBE began easing its monetary policy stance in response to lower inflationary pressures, key interest rates have been cut by a total of 10 percentage points.

     Egypt's inflation rate dropped to 3.4 percent in August, the second lowest rate seen in almost 14 years after October 2019 and down from 4.2 percent in July, with CBE saying this continues to reflect "muted" inflationary pressures.

     This month annual core inflation is expected to be affected by unfavorable base effects due to the change in the consumer price index but CBE confirmed it still it expects average annual inflation to hover around the lower bound of its inflation target of 9 percent, plus/minus 3 percentage points in the fourth quarter of this year.

     Preliminary data shows that Egypt's economy expanded 3.5 percent in the 2019/20 fiscal year, which ended June 30, down from 5.6 percent in the previous year while the unemployment rate jumped to 9.6 percent in the second calendar quarter from 7.7 percent in the first quarter due to the impact of COVID-19 on the economy.

     "However, the stability of some leading indicators in August and July after signs of improvement in June point to a gradual recovery in economic activity," CBE said.

      The Central Bank of Egypt issued the following statement:

"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 50 basis points to 8.75 percent, 9.75 percent, and 9.25 percent, respectively. The discount rate was also cut by 50 basis points to 9.25 percent.

Annual headline urban inflation declined to 3.4 percent in August from 4.2 percent in July 2020, the second lowest rate recorded in almost 14 years, after October 2019’s figure. Annual headline inflation continued to reflect muted inflationary pressures registering below 6 percent since February 2020. The decline in annual headline urban inflation was driven by lower annual contribution of food items, which more than offset slightly higher annual contribution of non- food items. This came as prices of fresh vegetables came against their seasonal pattern for the second consecutive month. Hence, monthly headline inflation continued to reflect lower food prices and higher nonfood prices for the fourth consecutive month. In the meantime, annual core inflation rate recorded 0.8 percent in August 2020, compared to 0.7 percent in July 2020. In September 2020, annual core inflation is expected to be affected by unfavorable base effect, given the release of the 10th CPI series as well as its linking methodology with the 9th CPI series starting with September 2019 data.

Preliminary figures announced recently show that real GDP growth for FY19/20 recorded 3.5 percent, down from 5.6 percent in the previous fiscal year. Meanwhile, the unemployment rate recorded 9.6 percent in 2020 Q2 up from 7.7 percent in 2020 Q1. These developments reflect COVID-19’s impact on the real economy. However, the stability of some leading indicators in August and July after signs of improvement in June point to a gradual recovery in economic activity.

Globally, economic activity remained subdued despite some recovery, international oil prices broadly stabilized, and global financial conditions continued to improve, supported mainly by policy-measures despite the ongoing uncertainty.

As incoming data continues to confirm the moderation of inflation expectations, the reduction of policy rates in today’s MPC meeting provides appropriate support to economic activity, while remaining consistent with achieving price stability over the medium-term. In 2020 Q4, average annual headline inflation is expected to hover around the lower band of the inflation target 9 percent (±3 percentage points).

The MPC closely monitors all economic developments and will not hesitate to utilize all available tools to support the recovery of economic activity, within its price stability mandate."

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