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Contrary to the expectations of economic analysts, observers and financial experts, who favored keeping interest rates unchanged, the Monetary Policy Committee of the Central Bank of Egypt decided, at its meeting on Thursday, November 12, 2020, to reduce both the interest rate overnight deposits and loans as the central bank’s main transaction rate at 50 basis points. It reached 8.25%, 9.25% and 8.75%, respectively. The credit and discount rate was also reduced by 50 basis points to 8.75%.
The annual overall urban inflation rate increased for the second month in a row, to 4.5% in October 2020, compared with 3.7% in September 2020 and 3.4% in August 2020.
The increase in the annual rate of headline inflation was mainly driven by the increase in the annual contribution of food products, in addition to the contribution of goods and services that have an administrative price, but to a lesser extent in October 2020.
This is due to the continuous increase in the annual rate of inflation of food products for the second consecutive month, despite its negative rates.
Meanwhile, the annual core inflation rate increased to 3.9% in October 2020 compared to 3.3% in September 2020 from 0.8% in August 2020, which was in line with expectations, due to the negative impact of the base period.
However, annual inflation rates continued to reflect the containment of inflationary pressures.
The real GDP growth rate was recorded at 3.6% during the 2019/2020 fiscal year, compared to 5.6% during the previous fiscal year. This occurred as a result of the slowdown in the growth rate during the second quarter of 2020, especially in light of the containment measures of the Corona pandemic, to register, according to preliminary data, negative 1.7%, compared to a growth rate of 5.0% during the first quarter of 2020.
The increase in the contribution of consumption to the real growth rate of GDP was partly to limit the decline in the contribution of investments and net exports, but to a lesser extent during the same period.
This was also reflected in the unemployment rate, which registered 9.6% during the second quarter of 2020 compared to 7.7% during the first quarter of the same year. Initial indicators for the third quarter of 2020 have continued to gradually recover.
Globally, economic activity remains weak despite some recovery. World oil prices have generally stabilized and global financial conditions continued to improve, as a result of economic facilitation measures, despite the prevailing uncertainty.
However, there are risks surrounding the outlook for global economic activity as a result of the spread of the second wave of the Corona pandemic, the return of the closure and the tightening of precautionary measures, which will negatively affect the outlook for the world economy .
Due to the above, and as the average inflation rate during the fourth quarter of 2020 is expected to register unique low rates below the 6.0% level, which confirms the continued containment of inflationary pressures expected in the medium term. Consequently, the Monetary Policy Committee decided to cut the central bank’s benchmark interest rate by 50 basis points.
The reduction of the basic rates of return at the committee meeting provides adequate support to economic activity at the current moment and that decision is consistent with achieving price stability in the medium term.
The Monetary Policy Committee will closely monitor all economic developments and risk balances and will not hesitate to use all its tools to support the recovery of economic activity, provided that inflationary pressures are contained.
