The Central Bank of Egypt (CBE) is expected to leave interest rates unchanged when it meets on Thursday as inflation cools, FX inflows pick up, and the USD / EGP exchange rate stabilizes, according to our interest rate poll. All 11 of the analysts and economists we surveyed expect the Monetary Policy Committee (MPC) to hold rates steady.

Where rates currently stand: The overnight deposit rate stands at 27.25%, the overnight lending rate at 28.25%, and the main operation and disc. rates at 27.75%. The MPC delivered a jumbo 600 bps rate hike following a surprise monetary policy meeting in March, which coincided with the float of the EGP and a bigger package from the IMF.

The rationale: Things have stabilized post jumbo hike and float. The USD / EGP exchange rate is stable, FX liquidity has returned to the official banking system, and net foreign reserves jumped to their highest level in two years, HC Securities’ Heba Mounir told Enterprise.

The EGP will continue to strengthen against the USD, mainly on the back of the Ras ElHekma funds landing in the state’s coffers, economist Mona Bedeir told us. “Although this trend will not continue because a big chunk of our FX inflows will be used to cover financing needs, be it for debt servicing, balance of payments, or to boost FX in banks,” she continued.

It’s still too early to scream rate cuts: “It is too early to [cut rates], as it’s only been two months since the float of the EGP and there are still some inflationary pressures on the horizon, especially with a new hike in fuel prices likely in June,” EFG Hermes chief economist Mohamed Abu Basha told Enterprise. He expects the MPC to start cutting rates in 4Q 2024, when inflation cools to 23-24%.

Most are penciling rate cuts in 2H: Ahmed Hafez, head of Research at Beltone Holding, is “no longer ruling out a 2H 24 rate cut,” adding that “there could be a window to kick-start monetary easing on 5 September.” Zilla Capital’s Aya Zoheir expects the central bank to start cutting rates between the end of 2024 and the beginning of 2025, “after ensuring inflation is under control.”

Cutting rates prematurely will hurt the EGP: Cutting rates now will weaken the EGP against the greenback, which will in turn push inflation higher. It will also trigger FX outflows, IBIS Consultancy economist Ali Metwally told us.

It’s all about inflation: “We expect inflation to continue its deceleration path, to possibly reach CBE target in 2H 2025. Hence, we believe the CBE is unlikely to start the easing cycle before 4Q 2024,” CI Capital’s Sara Saada told Enterprise. The central bank’s average inflation target is 7% (±2%) by 4Q 2024 and 5% (±2%) by 4Q 2026.

Remember: Inflation cooled for the second consecutive month in April, recording 32.5% down from 33.3% the month before.

Regional issues to bear in mind: “We expect a gradual appreciation [of the EGP], but that will remain limited as long as the geopolitical impact on the Suez Canal and other balance of payment revenues remain in place,” Saada said.

All eyes on the Fed: “We won’t see a rate cut before the US Federal Reserve starts reversing its aggressive monetary tightening policy,” Metwally said. With potential interest rate cuts on the Fed’s cards, Egypt may not need to keep its own rates high as it will negate the interest rate differential.

ICYMI- The Fed has left interest rates at their current 22-year high of 5.25-5.5% for the past few policy meetings, but traders are hopeful that cuts are coming this year.

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