The Central Bank of Egypt (CBE) expects a significant decline in inflation during the first half of 2025. Recent inflation developments, following the extraordinary Monetary Policy Committee (MPC) meeting on 6 March, serve as an early indicator that monthly inflation rates are returning to their usual pattern before March 2022.
During the MPC meeting, held on Thursday, the CBE decided to maintain fixed basic return rates: 27.25% for deposits, 28.25% for lending, and 27.75% for the main operation rate, credit, and discount rates. These levels align with the rates set during the 6 March extraordinary meeting when they were increased by 6% simultaneously.
The committee’s decision to fix interest rates reflects the latest global and local developments and expectations. Additionally, inflation is expected to moderate in 2024 as inflationary pressures recede. The peak has already been reached, and the combination of factors such as restrictive monetary policy, a unified foreign exchange market, and the positive impact of the base period should lead to a significant decrease in inflation during the first half of 2025.
CBE highlights several contributing factors to achieving price stability. These include substantial foreign direct investment flows, improvements in the external financing environment, and increased domestic and foreign demand for assets denominated in the Egyptian pound.
Despite fluctuations, inflationary pressures have been on a downward trend. General and core inflation reached their peaks at 38% in September 2023 and 41% in June 2023, respectively. Even with an unexpected rise in February 2024, general and core inflation declined to 32.5% and 31.8% in April 2024.
The positive impact of the base period further contributed to reducing inflation rates in 2024, particularly due to periods of high inflation in 2023. While food supplies drove the annual rate of general inflation since December 2022, non-food commodities have somewhat limited the ongoing decline in food commodity inflation since November 2023.
However, the Committee acknowledges risks surrounding the expected inflation path. These risks include geopolitical tensions, adverse climate conditions, both locally and globally, and public financial control measures.
Globally, economic growth remains positive, albeit with expected rates lower than historical averages. Major central banks continue their restrictive monetary policies to converge inflation rates toward target levels, despite the decline in global inflation rates.
Regarding global commodity prices, especially energy, supply and demand developments in the medium term remain uncertain. Supply vulnerabilities persist due to geopolitical tensions while emerging economies show improved credit risk prospects amid expectations of easing monetary policies in developed economies.
At the local level, Egypt’s real gross domestic product (GDP) grew 2.3% in the fourth quarter of 2023. However, the industrial sector’s declining contribution to growth led to a slowdown. Initial indicators for the first quarter of 2024 suggest continued weakness in economic activity, resulting in an expected slowdown in GDP growth during the fiscal year 2023/2024 compared to the previous year. Nevertheless, economic activity is projected to recover starting from the 2024/2025 fiscal year.
Considering these developments, the MPC believes that maintaining unchanged basic return rates for CBE is appropriate and necessary during the current period. The committee will continue evaluating the impact of its decisions on the economy, closely monitoring data and risks related to inflation expectations.
The expected path of basic return rates depends on anticipated inflation rates rather than prevailing inflation rates. The committee remains committed to using available monetary policy tools to reduce monthly inflation rates and achieve medium-term price stability sustainably.
