CBE leaves interest rates unchanged in line with expectations

Holding steady: The Central Bank of Egypt (CBE) left interest rates unchanged on Thursday. The Monetary Policy Committee (MPC) cited a slowdown in growth rates and cooling inflation, it said in a statement (pdf).

Where rates 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%.

Remember: 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.

Rising non-food inflation has offset deaccelerating food inflation: While food price increases have been steadily slowing down, they have been offset by rising non-food inflation since November 2023, the CBE said. The central bank also voiced concern about potential run-ups in global commodity prices — especially energy — as they are susceptible to supply shocks and geopolitical tensions.

ICYMI: Inflation cooled for the second consecutive month in April, recording 32.5% down from 33.3% the month before. The central bank’s average inflation target is 7% (±2%) by 4Q 2024 and 5% (±2%) in 4Q 2026.

No surprise there: The CBE’s decision was unanimously forecasted in our interest rate poll of 12 analysts and economists last week. Those surveyed argued that a premature rate cut wouldn’t bode well for either inflation or the EGP stability.

When can we expect rate cuts? “The CBE must ensure monetary policy remains restrictive to stabilize inflation expectations. Cutting rates at this stage would be premature due to negative real rates that still prevailed,” economist Mona Bedeir said in a note shared on LinkedIn. Bedeir expected the CBE to keep interest rates steady throughout the year and potentially start cutting in 1Q 2025.

Premature rate cuts will hurt the EGP: Cutting rates now would be premature “given the stress placed on restoring monetary policy credibility in the March IMF program and the importance of anchoring the new FX regime,” Simon Williams, HSBC’s chief economist for Central and Eastern Europe, the Middle East, and Africa told us last week. Cutting rates now will also 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.

How much are we talking? Cutting rates too aggressively and too quickly will send the wrong message to short-term foreign investors, Cairo Capital Securities Chief Economist Hany Genena told Al Arabiya. He pointed to a 200-300 bps rate cut, saying that it will keep local debt attractive to investors.

What does the MPC think? “A significant decline in inflation is anticipated in H1 2025 due to the combined impact of recent monetary policy tightening, unification of the foreign exchange market, and favorable base effects,” the MPC said in the statement.

What’s next? The MPC’s next meeting is scheduled for 18 July.