Central Bank of Egypt : Monetary Policy Report 2020 IV

Central Bank of Egypt

Monetary Policy Report

IV / 2020

Disclaimer

The cut-off date for the data included in this report is February 15th, 2021. Some of the data presented is preliminary or subject to revisions. There has been new incoming data since the cut-off date, including but not limited to the release of the inflation statistics for February 2021. Further- more, the Monetary Policy Committee decided in its meeting held on February 4th, 2021 and March 18th, 2021 to keep its key policy rates unchanged. These and all other incoming data will be incorporated in the following Monetary Policy Report.

Monetary Policy Report IV / 2020

| Central Bank of Egypt

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Table of Contents

THE INITIAL CONDITIONS………………………………………………………………………………………	PAGE 3
THE OUTLOOK………………………………………………………………………………………………….…..	PAGE 16
APPENDIX: TABLES AND ABBREVIATIONS..……….……………………………………………….....	PAGE 18

Monetary Policy Report IV / 2020

| Central Bank of Egypt

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Figure 1

Economic Growth of Egypt's External Environ-

ment 1/

(In %, y/y)

7.5
5.0
2.5
0.0
-2.5
-5.0
-7.5		Advanced economies
-10.0
-12.5		Emerging economies
-15.0		World
-17.5
Jun-18	Sep-18	Dec-18		Jun-19	Sep-19	Dec-19		Jun-20	Sep-20	Dec-20
Mar-18	Mar-19	Mar-20

Source: Bloomberg & Central Bank of Egypt calculations.

1/ The series is weighted using Egypt's trade volume in 2015/16. * Dec-2020 figures include estimates

Figure 2

Headline Inflation of Egypt's External Environ-

ment 1/

(In %, y/y)

				Advanced economies
10				Emerging economies
			World
8
6
4
2
0	14	15	15	16	16	17	17	18	18	19	19	20	20
-2	Dec-	Jun-	Dec-	Jun-	Dec-	Jun-	Dec-	Jun-	Dec-	Jun-	Dec-	Jun-	Dec-

Source: Bloomberg & Central Bank of Egypt calculations. 1/ The series is weighted using Egypt's trade volume in 2015/16.

Figure 3

Contribution to Brent price change

(In %, January 2010 = 100, monthly average)

200%

100%
0%
-100%
-200%			Demand		Supply
-300%			Residual		Brent price
Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-18Jan-19Apr-19Jul-19Oct-19Jan-20Apr-20Jul-20Oct-20Jan-21

Source: Federal Reserve Bank of New York.

The Initial Conditions

1. Globally, economic activity is expected to have contin- ued to contract in 2020 Q4, albeit at a softer pace compared to 2020 Q3. World trade began to slightly recover some of the losses incurred in the first half of 2020, while inflation continued to decelerate in 2020 Q4. International oil prices have continued to rise, reaching a post-pandemic peak to date in February 2021. Capital inflows into emerging markets contin- ued to increase during the period between November 2020 and January 2021, supported by the accommo- dative global financial conditions, and the continued rollout of vaccines.

Global economic activity continued to be impacted by the COVID-19 pandemic, and the subsequent measures taken to curb its spread. As a result, growth in Egypt's external environment is expected to have continued to contract by 3.0% in 2020 Q4, albeit at a softer pace compared to the negative 3.5% registered in preceding quarter. This marks the fourth consecutive quarter of negative global growth in Egypt's external environment. However, growth is expected to slightly return to positive territory in 2021 Q1.

More specifically, economic activity in advanced economies continued contracting by 3.4% in 2020 Q4, compared to negative 3.3% in 2020 Q3 and negative 10.2% in 2020 Q2. The deterioration in growth in advanced economies in 2020 Q4 was mostly driven by a sharp 5.0% contraction in the Euro Area, despite the softer broad-based contractions in the United States, Japan and the United Kingdom. On a similar note, emerging economies-economic activity also registered negative growth during 2020 Q3, however, with a marked improvement compared to the preceding quarters. Growth recorded negative 0.2% during 2020 Q3, from negative 2.0% in 2020 Q2. The notable easing of the negative growth emanated from the continued positive growth exhibited by China, which mostly offset the contractions witnessed in India, Russia, and Brazil. Recent data from China points to an expected recovery in overall emerging market economies growth during 2020 Q4, alongside the continued softening of the contraction in the other emerging market economies.

Monetary Policy Report IV / 2020

| Central Bank of Egypt

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Figure 4

International Food Prices

(In %, y/y, using domestic CPI basket weights of core food items)

10

5

0

-5

-10

-15

-20

-25

Jan-21

Oct-20

Jul-20

Apr-20

Jan-20

Oct-19

Jul-19

Apr-19

Jan-19

Oct-18

Jul-18

Apr-18

Jan-18

Oct-17

Jul-17

Apr-17

Jan-17

Oct-16

Jul-16

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Source: Central Bank of Egypt calulations, World Bank and Food and Agriculture Organization of the United Nations.

Annual headline inflation of Egypt's external environment decelerated to 0.9% in 2020 Q4 from 1.3% in 2020 Q3 and 2020 Q2. Inflation in advanced economies dropped to 0.1% in 2020 Q4 from 0.3% in 2020 Q3 and 2020 Q2. The drop in inflation was driven by the deflation in the Euro Area and Japan in 2020 Q4, and by the deceleration in the United Kingdom's headline inflation compared to 2020 Q3. Combined, all of the latter offset the slight acceleration in inflation in the United States. Similarly, inflation in emerging market economies fell to 2.9% in 2020 Q4 relative to 3.5% in the preceding quarter. The latter came largely on the back of a deceleration in China and India's inflation rates, which more than compensated for the acceleration in Russia and Brazil's inflation figures.

Global trade embarked on its path to recovery in 2020 Q4, reversing the negative trend present since 2019 Q2, which was further amplified by the impact of COVID-19 since 2020 Q2. In fact, global trade registered a positive growth rate of 0.3% on an annual basis in 2020 Q4, from negative 4.3% in the preceding quarter. Despite the positive out- turn in 2020 Q4, global trade in 2020 contracted by 5.3% on average.

Figure 5

Advanced Economies Central Banks' Key Policy Rates

(In %)

3.0

Federal Reserve

2.5

Bank of England

2.0

European Central Bank

1.5

1.0

0.5

0.0

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Source: Bloomberg and Central Bank of Egypt calculations.

Brent crude oil prices have risen on average for five consecutive months since October 2020, registering an average post-pandemic peak level of 60 USD/barrel in the first half of February 2021. This marks a significant increase from the trough of USD 18.4/barrel recorded in April. The recent increases in November, December and January 2021 were mainly driven by a reduction in supply, which were coupled with seasonal increases in demand due to the winter season. Moreover, the first half of February saw prices continue to increase driven by higher demand, amidst slightly lower supply. In the meantime, international food prices, using domestic CPI basket weights of core food items, continued to decline on annual terms since March 2020, with the exception of a marginal pickup in September 2020. On an annual basis, the declines were mostly driven by lower red meat and poultry prices.

Monetary Policy Report IV / 2020	| Central Bank of Egypt	4