In today’s meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to maintain the CBE’s overnight deposit rate, overnight lending rate, and the rate of the main operation at 27.25 percent, 28.25 percent, and 27.75 percent, respectively. The Committee also decided to maintain the discount rate at 27.75 percent.
While the outlook for global economic growth and inflation remains uncertain, some central banks in both advanced and emerging market economies have continued to gradually cut their policy rates. Others have opted to remain cautious in light of unfolding global economic developments. Economic growth remains broadly stable and is expected to continue at the current pace well into the medium term, though it has not yet returned to pre-pandemic levels. This outlook is still subject to risks, particularly from the currently restrictive monetary stance that could dampen demand, as well as the resurgence of protectionist policies and their impact on global trade. With respect to inflation, global commodity prices have shown volatility recently, with forecasts suggesting an increase in their prices over the medium term, especially grain prices. This is still subject to risks, including heightened geopolitical tensions and policy disruptions to global trade.
Domestically, preliminary indicators for Q4 2024 suggest that economic activity grew at a faster pace compared to the 3.5 percent registered in Q3 2024, indicating sustained recovery in economic activity. Real GDP growth in Q3 2024 was primarily driven by the increasing contributions of manufacturing and transportation. While estimates for the output gap indicate that real GDP remains below potential, supporting the disinflation path over the short term, it is expected that the economy will gradually move closer to its full potential by end of FY 2025/26. Regarding the labor market, the unemployment rate declined to 6.4 percent in Q4 2024 from 6.7 percent in Q3 2024.
Annual inflation experienced a slower pace of deceleration throughout the second half of 2024 compared to the first half, stabilizing at 24.0 percent in January 2025. Similarly, annual core inflation remained broadly stable in Q4 2024, recording 22.6 percent in January 2025. While annual food inflation continues to decelerate, recording 20.8 percent in January 2025, annual non-food inflation remains sticky around 25.5 percent on average throughout 2024, reflecting the gradual dissipation of previous shocks.
Upside risks surrounding the inflation outlook have increased compared to the previous MPC meeting. This is due to the increasingly uncertain global and regional outlook regarding the impact of U.S. protectionist trade policies and geopolitical tensions. Nevertheless, headline inflation is expected to decline substantially in Q1 2025, driven by the cumulative impact of monetary policy tightening and the favorable base effect. This downward trajectory will continue during 2025, albeit at a slower pace given the expected drag effect from the fiscal measures aimed at tightening the fiscal stance. As such, underlying inflation is expected to converge to its historical average over the medium term, suggesting an improvement in inflation expectations.
Given the prevailing uncertainty and recent developments, the MPC judges that the current policy rates are appropriate to maintain a sufficiently tight monetary stance. This will ensure the realization of the projected disinflation path, and firmly anchor inflation expectations. Accordingly, the Committee’s decisions regarding the appropriate time for beginning the accommodative cycle will be assessed on a meeting-by-meeting basis. Decisions will continue to be made in response to the forecast trajectory and will be sensitive to the prevailing balance of risks. The MPC will continue to monitor economic and financial developments and will not hesitate to utilize all tools at its disposal to achieve its price stability mandate. This includes steering inflation towards the target by containing demand-side pressures and second-round effects arising from supply shocks.