The Central Bank of Egypt (CBE) has once again opted to keep interest rates unchanged, marking the seventh consecutive time it has done so. The Monetary Policy Committee (MPC) cited increased inflation risks compared to its last meeting on December 26, 2024, as the primary reason behind this decision.
During its meeting last Thursday, MPC decided to keep the key interest rates unchanged for the seventh consecutive time, keeping the overnight deposit rate at 27.25%, the overnight lending rate at 28.25%, and both the main operation rate and the discount rate at 27.75%.
CBE had previously raised interest rates by 600 basis points in March 2024, bringing the total increase to 1,900 basis points since CBE began its monetary tightening policy in 2022.
In its statement accompanying the interest rate decision, MPC stated that some central banks in both advanced and emerging economies have continued to gradually reduce their interest rates, despite the ongoing uncertainty surrounding global economic growth and inflation. Meanwhile, other central banks have chosen to adopt a more cautious approach, anticipating rapid global economic developments.
The committee pointed out that economic growth remains largely stable and is expected to continue at its current pace in the medium term, although it has not yet returned to pre-pandemic levels. However, it noted that these expectations remain subject to several risks, the most significant of which are the negative impact of restrictive monetary policies on economic activity, the return of protectionist trade policies, and their effects on global trade.
Regarding inflation, the committee explained that global commodity prices have fluctuated recently. It noted that expectations indicate a potential increase in their prices in the medium term, especially grain prices. However, these expectations remain subject to risks, including escalating geopolitical tensions and disruptions in global trade resulting from protectionist policies.
On the domestic front, the committee stated that preliminary indicators for Q4 2024 suggest that economic activity grew at a faster pace than in Q3 2024, which recorded a growth rate of 3.5%, indicating continued economic recovery. It also noted that the growth in real GDP in Q3 2024 was primarily driven by the increased contributions of the manufacturing and transport sectors.
The committee pointed out that while output gap estimates suggest that real GDP remains below its maximum potential, which supports the expected downward trajectory of inflation in the short term, economic activity is expected to gradually approach its full potential by the end of the 2025/2026 fiscal year.
Regarding the labour market, the committee added that the unemployment rate declined to 6.4% in Q4 2024, compared to 6.7% in Q3 2024.
As for inflation, the committee explained that the pace of annual inflation slowdown in the second half of 2024 was less than in the first half of the year, with the inflation rate stabilizing at 24% in January 2025. Similarly, core inflation remained generally stable in Q4 2024, registering 22.6% in January 2025.
The committee noted that while annual food inflation continued to slow, recording 20.8% in January 2025, non-food inflation remained stable at an average of 25.5% throughout 2024, reflecting the gradual fading of previous shocks.
MPC pointed out that the upside risks surrounding inflation have increased compared to its last meeting on December 26, 2024, due to growing uncertainty regarding the global and regional outlooks, particularly regarding the impact of US protectionist trade policies and geopolitical tensions.
However, the committee expects headline inflation to decline significantly in Q1 2025, driven by the cumulative impact of monetary tightening and the positive base effect.
The committee believes that this downward trend will continue but at a slower pace, given the expected impact of fiscal consolidation measures. It also expects that monthly inflation rates will gradually return to historical levels in the medium term, signalling improving inflation expectations.
The committee stated that, given recent developments and prevailing uncertainty, keeping the central bank’s key interest rates unchanged is appropriate at this time to maintain restrictive monetary policy and ensure a significant and sustained decline in inflation, thereby anchoring expectations.
It emphasized that it will continue evaluating its decisions regarding the start of an easing cycle on a meeting-by-meeting basis, stressing that these decisions will depend on forecasts, surrounding risks, and new economic data. Additionally, the committee reaffirmed that it will closely monitor economic and financial developments and assess their potential impact on key economic indicators.
