The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided on Thursday to cut the overnight deposit rate, overnight lending rate, and the rate of the main operation by 0.5 per cent (50 bps) to reach 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively.

The discount rate was also cut by 0.5 per cent to 8.75 per cent .

The new cuts bringing the total cuts in 2020 to 4 per cent (400 bps) after a 3 per cent cut in March and 0.5 per cent cut in September.

The MPC's decision was driven by the latest levels of annual headline urban inflation, which increased to 4.5 per cent in October 2020, up from the 3.7 per cent in September and the 3.4 per cent in August, CBE said in a statement.

CBE said that the increase in annual headline inflation continued to be mainly led by the higher annual contribution of food items as well as regulated items due to the negative annual food inflation eased for the second consecutive month.

Meanwhile, annual core inflation rose to 3.9 per cent in October 2020, up from 3.3 per cent in September 2020.

According to the statement, annual inflation rates continued to reflect muted inflationary pressures.

“Preliminary figures show that real GDP growth for FY 2019/2020 declined to 3.6 per cent, down from 5.6 per cent in FY2018/2019. Growth was dragged downwards in the second quarter of 2020, mainly due to the partial lockdown measures that were implemented to contain the COVID-19 pandemic, registering negative 1.7 per cent, down from 5.0 per cent in the first quarter of 2020,” said CBE in the statement.

It also added that the pickup in consumption in the second quarter of 2020 was not enough to face the combined contraction in investments, and to a lesser extent in net exports, which was also reflected in the unemployment rate which surged to 9.6 per cent in the second quarter of 2020, up from 7.7 per cent in the first quarter of 2020.

Meanwhile, leading indicators for the third quarter of 2020 continue to show gradual signs of recovery.

According to the statement, global economic activity remains weak despite some recovery; international oil prices broadly stabilized, and global financial conditions continued to improve, supported mainly by policy measures despite the ongoing uncertainty.

On the inflation outlook in the fourth quarter of 2020, CBE estimated it to be in the low single digits range, surging to 6 per cent confirming the muted inflationary pressures in the medium-term.

It added that as a result of the path for current policy rates remains a function of medium-term inflation expectations rather than current inflation outturns, the MPC decided to introduce the mentioned cuts.

“The reduction in key policy rates in today’s MPC meeting provides appropriate support to economic activity, while remaining consistent with price stability over the 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,” said CBE statement.

The last MPC meeting in 2020 is to be held on 24 December.