The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is set to hold its final meeting of the year on Thursday, to decide on key interest rates, which serve as primary indicators of short-term trends for the Egyptian pound. Strong expectations suggest that the CBE will keep rates unchanged for the sixth consecutive time.
In its previous meeting on November 21, the MPC decided to maintain the overnight deposit rate at 27.25%, the overnight lending rate at 28.25%, the main operation rate at 27.75%, and the discount rate at 27.75%, marking the fifth consecutive decision to hold rates steady.
The MPC’s statement emphasized that, despite growing expectations for lower global commodity prices, particularly energy, inflation risks remain due to the vulnerability of commodity prices to supply shocks such as global disruptions and adverse weather conditions. The statement also mentioned that inflation is expected to stabilize at current levels through the end of 2024, though upward risks persist. These risks include ongoing geopolitical tensions, signs of protectionist policies, and the potential impact of fiscal consolidation measures.
Earlier this month, the CBE reported a decline in the annual core inflation rate to 23.7% in November 2024, down from 24.4% in October. The monthly core consumer price index, calculated by the CBE, showed a 0.4% increase in November 2024, compared to 1.0% in November 2023 and 1.3% in October 2024.
Similarly, the Central Agency for Public Mobilization and Statistics (CAPMAS) reported a slowdown in the annual inflation rate in urban areas to 25.5% in November 2024, down from 26.5% in October. The monthly inflation rate rose by 0.5% in November 2024, compared to 1.3% in November 2023 and 1.1% in October 2024.
The CBE expects inflation to decrease significantly starting in the first quarter of 2025, driven by the cumulative effects of monetary tightening and the positive base effect.
Investment banks, including HC, EFG Hermes, Beltone, Naeem, Zilla Capital, CI Capital, Al Ahly Pharos, Prime, Mubasher Financials, Thndr, Arab African Securities, Cairo Capital, and Arabia Online, expect the CBE to keep interest rates unchanged in tomorrow’s meeting, based on the latest developments in Egypt’s macroeconomy and ongoing geopolitical uncertainties.
Heba Monir, a financial analyst and economist at HC, commented: “Egypt’s external position remains stable, but USD liquidity was lower than the previous month. Net international reserves (NIR) rose by $10 million month-on-month in November, reaching $46.952bn, compared to $46.942bn in October. This represents the lowest increase since September 2022, possibly due to Egypt’s scheduled repayment of $3bn in green and Islamic financing to Gulf banks and $1.32bn in matured Eurobonds during November.”
She added: “The banking sector’s net foreign assets (NFA) narrowed by 10.8% month-on-month to $9.21bn in October, down from $10.3bn in September, reversing a net foreign liability (NFL) position of $27.2bn a year earlier and an NFL of $1.41bn, excluding the CBE. Meanwhile, Egypt’s 1-year CDS has dropped to 353, from 857 bps on January 1.”
Monir also noted the slight rise in the PMI index for the second consecutive month, reaching 49.2 in November from 49.0 in October. Although it remains below the 50.0 mark, the report shows that the contraction softened, attributed to weak customer demand.
She expects inflation to decelerate to 24.1% year-on-year and 0.2% month-on-month, driven by relatively stable or lower vegetable and fruit prices due to seasonality. Regarding the exchange rate, the Egyptian pound has depreciated by 2.5% since the start of December, as the USD strengthens against other currencies.
Monir pointed out that the latest 12-month T-bill auction showed a positive real interest rate of 2.9% over the weighted average yield of 26.24%, net of 15% tax on US and UK investors and factoring in the forecasted inflation estimate of 19.4% for the next year. She noted that this real yield could increase further with inflation deceleration.
“Given these factors, we expect the MPC to keep interest rates unchanged at its upcoming December 26 meeting, to maintain the attractiveness of the carry trade until inflation moderates,” she concluded.
A Reuters poll echoed these expectations, with all 12 analysts surveyed predicting that the CBE will leave the overnight deposit rate unchanged at 27.25% and the overnight lending rate at 28.25%.
Monica Malik of Abu Dhabi Commercial Bank stated: “We expect the CBE to keep interest rates steady until March 2025, when a sharp slowdown in inflation from February could pave the way for monetary easing.” She added that the central bank may prefer to see stability in the exchange rate before considering rate cuts.
Prominent banking expert Mohamed Abdel Aal commented: “Annual inflation for the entire country dropped to 25% in November 2024, down from 26.3% in October 2024. Inflation is expected to remain stable at these levels through the end of 2024, though risks persist due to geopolitical tensions, protectionist policies, and unexpected fiscal adjustments.”
Abdel Aal also noted that global central banks, including the US Federal Reserve and several European counterparts, have begun transitioning from restrictive to accommodative monetary policies by gradually lowering interest rates. However, he emphasized that Egypt’s MPC is likely to maintain its current stance, given both local and global economic conditions.
Despite easing inflation and rate cuts abroad, Abdel Aal identified four factors that could influence the MPC’s decision: geopolitical risks in the Middle East, pressure from the International Monetary Fund (IMF) to maintain restrictive policies, potential inflationary waves from subsidy reforms, and the significant gap between current inflation levels and the CBE’s target of 7% (±2%).
In conclusion, while global trends point toward monetary easing, Egypt’s MPC is expected to keep rates unchanged for another cycle, reflecting a cautious approach amid prevailing economic uncertainties.
