The Central Bank of Egypt (CBE) will convene on Thursday to deliberate the fate of the pound interest rate for the fourth time this year. Many investment banks anticipate that the CBE will maintain interest rates unchanged for the second consecutive time, following the previous decision made on 23 May.
On 23 May, the CBE opted to retain the main interest rates at the following levels:
- 25% for deposits
- 25% for lending
- 75% for the main operation and the discount rate
These rates were set during an extraordinary meeting on 6 March, where rates were raised by 6%, resulting in a total increase of 8% since the beginning of the year.
The CBE’s main interest rates serve as a crucial indicator for short-term pound interest rate direction. Any adjustments typically lead to corresponding changes in bank deposit and loan interest rates. Moreover, they directly impact interbank interest rates within the local interbank market and influence the main operation yield at the CBE, which manages excess liquidity in banks. Additionally, these rates affect the yield on local debt instruments and other related financial products.
Inflation remains a key driver considered by the CBE’s Monetary Policy Committee when making decisions about interest rates, alongside other local and global factors.
Earlier this month, the CBE reported a decrease in the annual core inflation rate to 26.6% in June 2024, down from 27.1% in May 2024. The monthly change in the core consumer price index, as prepared by the CBE, was 1.3% in June 2024, compared to 1.7% in June 2023 and -0.8% in May 2024.
Regarding the general consumer price index for urban areas, announced by the Central Agency for Public Mobilization and Statistics:
- The monthly change in June 2024 was 1.6%, compared to 2.1% in June 2023 and -0.7% in May 2024.
- The annual inflation rate for urban areas in June 2024 stood at 27.5%, compared to 28.1% in May 2024.
Looking ahead, the CBE projected a significant decline in inflation during the first half of 2025. Recent inflation developments since the extraordinary meeting in March 2024 indicate a return to the usual monthly inflation pattern observed before March 2022.
Several investment banks, including EFG Hermes, Beltone, Naeem, Zilla Capital, CI Capital, Al Ahly Pharos, Mubasher Financial Services, Thndr, and Arab African International Securities, expect the CBE to maintain interest rates unchanged for the second consecutive time. This expectation is based on the continuous decline in both headline and core inflation rates over the past few months.
HC Securities and Investment’s research department also anticipates that the CBE’s Monetary Policy Committee will keep the interest rate unchanged in its meeting scheduled for Thursday.
Financial analyst and economist Heba Monir at HC commented: “We expect the Monetary Policy Committee (MPC) to maintain the overnight deposit and lending rates at its upcoming meeting. Despite the year-on-year deceleration in headline inflation for four consecutive months (with month-on-month increases due to favourable base effects), there are several positive factors. These include improved foreign exchange (FX) liquidity following the Ras El Hekma investment deal, which boosted net international reserves (NIR) by approximately 33% year-on-year and 0.6% month-on-month to $46.4bn in June. Additionally, the banking sector’s net foreign liabilities (NFL) position of $29bn in January has turned into a net foreign assets (NFA) position of $14.3bn in May. Furthermore, Egypt’s one-year credit default swap (CDS) has improved to 303 basis points (bps) from 857 bps on 1 January. Moody’s upgraded Egypt’s credit outlook to Positive from Negative, and both Fitch and S&P revised it to Positive from Stable.
However, our interest rate model estimates that investors require a 36.1% interest rate on 12-month T-bills, aligning with the maximum yields requested by banks. This implies a real positive interest rate of 7.9%, compared to the current minor negative real interest rate of 0.6% (after accounting for a 15% tax rate for European and US investors). Since the Egyptian pound (EGP) floatation in March, the 12-month T-bill rate has rebounded to 26.1% (currently) from its lowest level of 25.7% in early April, although it remains below its peak of 32.3% in early March. Given the current negative real interest rate on treasuries and the potential for higher inflation following the imminent revision of household electricity and fuel prices in Q3 2024, we anticipate that the MPC will keep interest rates unchanged.
A Reuters poll involving 18 analysts also predicts that the CBE will maintain interest rates, with one analyst forecasting a 100 basis points cut. James Swanston of Capital Economics notes that the CBE is likely to hold rates steady, given that inflation remains well above the target range. Improved policy transparency since March means that signals about potential rate cuts will be closely monitored as inflation declines.
Simon Williams of HSBC emphasises that continued monetary tightening is necessary to maintain policy credibility, rebuild currency confidence, and lower inflation expectations. It is premature to consider rate cuts.
The CBE previously indicated that inflation would moderate in 2024, having already peaked, and is expected to decline significantly in the first half of 2025. Factors contributing to this include tight monetary policy, unified foreign exchange markets, and the positive base year effect.
While the CBE acknowledges risks to the inflation trajectory (such as geopolitical tensions and adverse weather conditions), they emphasise that the path for core interest rates depends on projected, not current, inflation rates.
The CBE reiterates its commitment to using all available monetary policy tools to maintain restrictive conditions, aiming to sustainably reduce monthly inflation rates and achieve medium-term price stability.
Egyptian banking expert Mohamed Abdel Aal suggests the Central Bank of Egypt maintain its current interest rate at its upcoming meeting. He believes this approach best balances controlling inflation with fostering economic growth.
Abdel Aal cites recent declines in inflation as evidence that current monetary policies are proving effective. He highlights the stabilisation of the Egyptian pound and the unification of the foreign exchange market as positive developments.
Maintaining rates, according to Abdel Aal, allows for continued monitoring of inflation’s response to existing policies. It also avoids placing an additional burden on government and private borrowing, thereby supporting economic activity. This approach, he argues, promotes relative market stability and facilitates further observation of economic trends, while offering moderate support for growth.
The final decision, Abdel Aal emphasises, rests with the Monetary Policy Committee. He expresses confidence in the Committee’s comprehensive understanding of Egypt’s macroeconomic situation and its commitment to prioritising the nation’s overall economic well-being. The Committee, he asserts, will strive to achieve a balance between curbing inflation and stimulating economic expansion.
