CBE explains fixing interest rates for 9th time in row

Keeping policy rates unchanged remains consistent with inflation target of 7% (±2%) on average in 4Q 2022, price stability in medium term

The Monetary Policy Committee (MPC) decided to keep the Central Bank of Egypt's (CBE) overnight deposit and lending rates, and the main operation price unchanged at 8.25%, 9.25%, and 8.75%, respectively. The discount rate also remained at 8.75%.
The MPC said in a statement that the annual headline urban inflation declined in October and November 2021, to 6.3% and 5.6%, respectively, from 6.6% in September. The decline came supported by favourable base effects in November 2021 stemming from the transitory supply shock witnessed in tomato prices during November 2020. Hence, the deceleration in November 2021 was driven by the lower annual contribution of food items, which more than offset the higher annual contribution of non-food items. The annual food inflation declined in November 2021 for the first time since April 2021, to record 8.1% from 11.6% in October 2021, due to the decline in the annual contribution of volatile food items, despite higher annual contribution of core and regulated food items. On the other hand, annual non-food inflation increased to 4.5% in November 2021 from 4.0% in October 2021, mainly reflecting higher annual contribution of rental values as well as higher prices of cafes and restaurants. Meanwhile, annual core inflation continued to increase, for the third consecutive month, to record 5.2 and 5.8% in October and November 2021, respectively, from 4.8% in September 2021 partially affected by unfavorable base effects.
Real GDP growth recorded 9.8% in 3Q 2021, compared to 7.7% in 2Q 2021. The aforementioned development reflects the sustained pick-up of domestic economic activity, as well as the partial impact of a positive base effect, leading indicators point towards a continued expansion across most economic sectors. Meanwhile, the unemployment rate stabilized at 7.5% in 3Q 2021, compared to 7.3% during the preceding quarter. Along the near outlook horizon, domestic economic activity is expected to be mainly driven by domestic demand, and in specific, gross domestic investments. Furthermore, real GDP growth is expected to continue being partially impacted by a positive base effect up until 4Q 2021.
Global economic activity continues to recover from the COVID-19 pandemic, but has shown some signs of slowdown due to global supply chain disruptions. Additionally, prospects of global economic recovery remain contingent on the efficacy of vaccines and the ability of countries to contain the spread of the virus, in light of the emergence of newer variants. Global financial conditions are expected to remain accommodative and supportive of economic activity over the medium-term. International prices for oil have increased at a slower pace, driven by both supply and demand factors. In the meantime, international prices for select mineral commodities have begun to decrease.
Against this background, the MPC decided that keeping policy rates unchanged remains consistent with achieving the inflation target of 7% (±2%) on average in 4Q 2022 and price stability in medium term.
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.
In the same context, the CBE revealed the details of the developments of the inflation rate with its general and basic indicators during the month of November 2021, as it clarified Annual headline urban inflation declined, for the second consecutive month, to record 5.6% in November 2021 from 6.3% in October 2021.
This comes as monthly headline urban inflation recorded 0.1% in November 2021 compared to 0.8% in November 2020.
The decline came supported by favorable base effects stemming from the transitory supply shock witnessed in tomato prices during November 2020.
Monthly headline urban inflation in November 2021 was mainly driven by non-food items.The increase in non-food items' prices reflected the seasonal increase in clothes' prices, the increase in rental values, the increase in prices of medical products and services and the increase in expenditures on restaurants and cafes. All of which were mainly reflected in retail items and services. Meanwhile, prices of volatile food items declined, broadly in line with their seasonal pattern and the resulting increase of their supply, which was only partly offset by higher core food prices, especially red meat. Moreover, prices of regulated food items increased, reflecting higher prices of subsidized vegetable oils as announced by the ministry of supply and internal trade.
This marks the second increase for rationed vegetable oil prices during 2021. This comes along with the broad-based increase of core food prices, especially market prices of edible vegetable oil and sugar, to reflect the continued impact of higher international food prices on domestic inflation as well as possibly the beginning of the impact of higher prices of subsidized fertilizers and higher natural gas prices for fertilizers and food industries factories, as recently announced by the government.
Edible vegetable oil and sugar recorded annual inflation of 27.2% and 18.2% respectively, which are their highest rates since October 2017.On an annual basis, the decline in headline inflation during November 2021 was driven by the lower annual contribution of food items, which more than offset the higher annual contribution of non-food items. Annual food inflation decelerated, for the first time since April 2021, to record 8.1% in November 2021 from 11.6% in October 2021; due to the decline in the annual contribution of volatile food items. On the other hand, annual non- food inflation increased to 4.5% in November 2021 from 4.0% in October 2021, mainly reflecting higher annual contribution of rental values as well as higher prices of cafes and restaurants.
Driven by the higher annual contribution of core food items and services, annual core inflation increased, for the third consecutive month, to record 5.8% in November 2021 from 5.2% in October 2021, partly affected by unfavorable base effects which reflect muted inflationary pressures during November 2020. This comes as monthly core inflation recorded 0.5% in November 2021 compared to zero in November 2020.
Nationwide annual inflation and annual rural inflation declined to 6.2% and 6.8% in November 2021 from 7.3% and 8.4% in October 2021, respectively. Prices of fresh vegetables and fruits declined by 13.3% and 2.3%, respectively. Together, fresh vegetables and fruits contributed by -0.55% to monthly headline inflation.
Prices of poultry declined by 6.2%, to contribute by -0.25% to monthly headline inflation.
Prices of red meat increased by 2.1%, which is the highest monthly increase since April 2020, to contribute by 0.08% to monthly headline inflation.
Prices of other edible oils increased by 8.1%, contributing by 0.04% to monthly headline inflation.
Prices of sugar increased by 12.2%, contributing by 0.03% to monthly headline inflation.
Prices of other core food items, including fats, dairy products, rice, pasta, wheat flour, pulses and tea increased to contribute by 0.22% to monthly headline inflation.
Prices of regulated items increased by 1.3%, to contribute by 0.32% to monthly headline inflation.This was mainly due to the increase in the prices of rationed vegetable oils, for the second time in 2021, by 19.0%. Prices of services increased by 0.5%, to contribute by 0.17% to monthly headline inflation.
This was mainly due to the increase in rental values, expenditures on restaurants and cafes, and the prices of privatehospitals' services.
Prices of retail items increased by 0.7% to contribute by 0.09 percentage points to monthly headline inflation. This was mainly due to seasonally higher prices of clothing.Monthly core inflation was affected by price changes of the aforementioned core CPI items.
Services items contributed by 0.24% to monthly core inflation. Core food items contributed by 0.16% to monthly core inflation. In addition, retail items contributed by 0.13% to monthly core inflation.