The Central Bank of Egypt (CBE) will determine on Thursday, the fate of the Egyptian pound’s interest rate. Market analysts widely anticipate that the CBE will opt to maintain the current rates for the third consecutive time.
The Monetary Policy Committee (MPC) of the CBE decided on 18 July to keep the key interest rates unchanged at 27.25% for deposits, 28.25% for lending, and 27.75% for the main operations, credit, and discount rates. This decision followed a similar stance taken on 23 May.
The current rates were established on 6 March when the MPC raised them by 6% in an extraordinary meeting, bringing the total increase since the start of 2024 to 8%. The committee believes that maintaining these rates is appropriate at present, as it supports a sustained downward trend in inflation. The MPC will continue to assess the impact of its decisions on the economy, considering the ongoing tight monetary conditions and upcoming data. The committee has emphasized its commitment to monitoring economic developments closely and evaluating the risks to inflation expectations.
According to the MPC, the future path of the key interest rates will depend on expected inflation rates rather than current inflation figures. The committee has reiterated that it will not hesitate to use all available monetary policy tools to preserve restrictive monetary conditions, aiming to reduce inflation sustainably and stabilize prices in the medium term.
The market was keenly awaiting the inflation data for August, which was set to be released next Tuesday by the CBE and the Central Agency for Public Mobilization and Statistics (CAPMAS).
Previously, the CBE reported that the annual core inflation rate dropped to 24.4% in July 2024, down from 26.6% in June. The monthly change in the core consumer price index (CPI), calculated by the CBE, was -0.5% in July 2024, compared to 1.3% in July 2023 and 1.3% in June 2024.
Additionally, CAPMAS announced that the monthly change in the headline CPI for urban areas was 0.4% in July 2024, down from 1.9% in July 2023 and 1.6% in June 2024. The annual headline inflation for urban areas stood at 25.7% in July, down from 27.5% in June.
Several investment banks, including EFG Holding, Beltone, Naeem, Zeila Capital, CI Capital, Al Ahly Pharos, Mubasher Financial, Thndr, Arab African International Securities, Cairo Capital, and HC Securities, have all predicted that the CBE will keep interest rates unchanged at Thursday meeting.
A Reuters poll also indicated that analysts expect the CBE to maintain interest rates during Thursday’s MPC meeting, given the continued decline in inflation. The median forecast among 15 analysts surveyed by Reuters was that the CBE would hold the deposit rate at 27.25% and the lending rate at 28.25%. Only one analyst anticipated a rate cut of 100 basis points.
James Swanston of Capital Economics stated: “We expect the CBE to keep interest rates unchanged as inflation remains well above target.” He added: “However, the momentum is heading in the right direction, and with a sharp decline in the main interest rate expected in early 2025, attention will shift to when the first rate cut will occur. We have identified the first quarter of 2025 as the likely timing.”
Prominent banking expert Mohamed Abdel Aal noted that both general and core inflation rates have consecutively declined for five months. Meanwhile, the US Federal Reserve and several European banks have openly begun transitioning from restrictive monetary policies to more accommodative ones, shifting their focus from containing inflation to targeting employment. This transition, which was expected to involve gradual rate cuts starting in September, could influence the CBE’s MPC to consider a shift towards a more accommodative monetary policy in Thursday meeting, encouraging economic growth after becoming confident that inflation is gradually subsiding.
However, Abdel Aal pointed out that opinions among observers still vary significantly regarding the MPC’s approach, which will ultimately decide. “Despite the recent decrease in Egypt’s stubborn inflation rate and the beginning of rate cuts in the US, we must remain cautious due to four critical factors that could influence future interest rate decisions.”
According to Abdel Aal, these factors include new and ongoing geopolitical and geoeconomic risks in the Middle East, which could disrupt supply lines and drive prices higher; pressures from the International Monetary Fund to continue pursuing restrictive monetary and fiscal policies to combat inflation; the government’s subsidy rationalization plan, which could trigger new inflationary waves; and the fact that current inflation rates are still far from the target range of 7% (±2%).
In light of these considerations, Abdel Aal suggested that, despite global trends in Europe and the US towards gradually easing monetary policies and reducing interest rates, the most likely outcome is that the CBE’s MPC will decide to maintain current interest rates for another cycle.
