CBE expected to keep interest rates unchanged when it meets on Thursday

Another uneventful Thursday ahead? The Central Bank of Egypt is expected to once again leave interest rates unchanged when it meets on Thursday, as persisting inflationary pressures keep potential rate cuts at bay, according to our interest rate poll. All eight of the analysts and economists we surveyed see the Monetary Policy Committee (MPC) holding 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 committee delivered a 600 bps rate hike following a surprise monetary policy meeting in March in conjunction with the float of the EGP and a larger loan package from the IMF being approved soon after.

Rates have been stable since March: The central bank hasn’t touched rates since its March rate hike — leaving them as is when it met in May and then again in its July meeting — citing its commitment to sustaining the current trajectory of inflation moderation.

We aren’t out of the woods just yet when it comes to inflation: Despite inflation being on a downward trend, “prematurely cutting rates could exacerbate the problem of core inflation,” economist Hany Abou El Fotouh tells us. “Our view on macroeconomic developments is positive, as we expect a positive adjustment in Egypt's credit rating at the beginning of 2025, which requires controlling inflation and not rushing to lower interest rates,” IBIS Consultancy economist Ali Metwally told us.

Remember: Annual urban inflation cooled to its lowest level since December 2022 in the last monthly data set, which showed annual inflation coming in at 25.7% in July, down 1.8 percentage points from 27.5% in June. Annual core inflation — which excludes volatile items such as food and fuel — slowed to 24.4%, down from 26.6%.

A recent uptick in inflationary pressures may soon start making its mark: Some analysts see inflation picking up again in August after falling for five consecutive months on the back of recent price hikes. Metwally sees inflation in August and September rising to somewhere in the range of 30-31% between August and September. The favorable base effect played a crucial role in reducing inflation over the five months ending in July, but this will change for August, September, and October as these months will reflect the impact of increased fuel and electricity prices,” Zilla Capital’s Aya Zoheir told us.

Inflation aside, the MPC will also be taking ongoing geopolitical tension and IMF demands into account when making its decision. “The central bank may adopt a more cautious approach and begin easing rates in 1Q 2025 if it sees a reason to do so in light of geopolitical tensions and their unpredictable developments,” Al Ahly Pharos analyst Esraa Ahmed told Enterprise. There is also pressure from the IMF to continue with restrictive monetary and fiscal policies to keep inflation tamed, EGBank board member Mohamed Abdel Aal tells us. Abdel Aal also pointed to planned subsidy cuts, also courtesy of the IMF, and their impact on inflation, explaining that all of this will likely push the MPC to keep rates unchanged.

ICYMI- We have an IMF loan review around the corner: The Fund is set to conduct the fourth review of our USD 8 bn loan program by the end of September or in October at the latest. The review, which was pushed back from its initial date in September, is set to unlock a USD 1.3 bn tranche.

All eyes on the Fed: Economist Mona Bedair sees the CBE continuing its wait-and-see approach even as the US Federal Reserves appears to be getting ready for a much-anticipated interest rate cut. The Fed cutting rates will not pressure the CBE to start cutting rates as well, she added. “If the Fed cuts rates this month, the pressure on the EGP will ease and it will strengthen against the USD,” Metwally said.

So if not this week, when will the CBE start slashing rates? Analysts see the CBE easing monetary policy by late 2024 or early 2025. The bank may start cutting rates in its November or December meetings after we start to see the impact of fiscal reforms on inflation, Bedair said. Some see rate cuts happening later, including CI Capital’s Sara Saada, who sees the bank kicking off its fiscal easing cycle in 1Q 2025.

Reuters analysts agree: The median prediction of 15 analysts polled by Reuters was that the CBE will hold rate this Thursday, with just one analyst penciling a 100 bps rate cut. “We anticipate interest rates being left on hold by the CBE given inflation remains well above target,” Capital Economics’ James Swanston told the newswire. “However, momentum is in the right direction and with a sharper fall anticipated in the headline rate in early 2025, attention will turn to when that first rate cut will be — for our part, we have penciled it in for 1Q 2025.”