The Central Bank of Egypt (CBE) has projected a significant decrease in inflation during the first quarter of 2025, attributed to the cumulative effects of its monetary tightening policies and the positive impact of the base period. The Monetary Policy Committee (MPC) emphasized that, while inflation is currently on a downward trend, it remains vulnerable to upward risks. The decision to maintain the current interest rates is deemed appropriate until inflation decreases substantially and sustainably.
The MPC’s announcement, following its decision to keep interest rates unchanged last Thursday, highlighted a continued reduction in inflationary pressures as the effects of previous shocks gradually subside. In July 2024, annual headline inflation dropped to 25.7%, while core inflation reached 24.4%, marking the fifth consecutive month of decline. Despite persistently high inflation in non-food items, the sharp decrease in food inflation drove overall inflation lower.
The committee noted that the annual inflation rate for food items fell to 29.7% in July 2024, its lowest level in nearly two years. This reflects the positive impact of the base period, following the high inflation rates witnessed in 2023. The ongoing decline in food inflation, coupled with improved inflation expectations, suggests that inflation is on a downward trajectory.
The MPC also stated that the recent monetary tightening policies have helped inflation return to its typical monthly pattern, with the impact of past exchange rates and supply shocks fading. The committee expects inflation to hover around its current levels until the fourth quarter of 2024, considering recent and upcoming fiscal consolidation measures. A notable decline in inflation is anticipated in early 2025, driven by the combined effects of monetary tightening and favourable base effects.
However, the committee warned that inflation’s downward trend remains exposed to upward risks, including potential disruptions to global oil supplies, escalating regional geopolitical tensions, uncertainty surrounding trade protectionism, and the possibility that fiscal consolidation measures may have a more pronounced impact than anticipated.
In its latest meeting, the MPC maintained the CBE’s key interest rates at 27.25% for deposits, 28.25% for lending, and 27.75% for the main operation and discount rate. This marks the third consecutive decision to hold rates steady, following similar moves in May and July 2024. The committee stated that this decision reflects recent global and local economic developments.
On the global front, economic growth remains relatively stable but is lower than pre-pandemic levels. Monetary tightening policies in advanced and emerging economies have contributed to a global decline in inflation, with some central banks beginning to lower interest rates as inflation nears target levels. The slight easing in monetary conditions is also linked to downside risks in employment and economic growth. Despite geopolitical tensions, energy prices have seen a slight decline, though uncertainty over commodity prices remains high.
Domestically, Egypt’s real GDP growth slowed to 2.2% in the first quarter of 2024, compared to 2.3% in the fourth quarter of 2023. This slowdown was attributed to reduced public sector activity, particularly due to the impact of the Red Sea navigation crisis on the services sector. While private sector activity has increased, it has not been sufficient to offset the decline in public sector contribution.
Preliminary indicators for the second quarter of 2024 suggest a slight recovery in real GDP growth, with expectations of gradual improvement starting from the 2024/2025 fiscal year. However, real economic activity remains below its potential, supporting the continued downward trend in inflation in the coming period. It is anticipated that real economic activity will remain below capacity until it approaches maximum potential in the medium term.
Regarding unemployment, the committee noted a decrease to 6.5% in the second quarter of 2024, down from 6.7% in the first quarter, driven primarily by increased employment in the agriculture sector.
In light of the above, and based on its previous decisions, the MPC believes that maintaining the current key interest rates is appropriate until inflation declines significantly and sustainably. The committee will continue to assess the impact of its decisions on the economy, considering the current tight monetary conditions and incoming data.
The MPC reaffirmed its commitment to closely monitoring economic developments and evaluating risks to inflation expectations. It emphasized that the future path of interest rates will depend on projected inflation rates, not the current rates. The committee reiterated that it will not hesitate to use all available monetary policy tools to support the downward inflation and achieve price stability in the medium term.
