Analysts see the central bank leaving rates unchanged during Thursday meeting: The Central Bank of Egypt is once again expected to leave interest rates unchanged when it meets on Thursday, as inflationary pressures continue to grow in tandem with rising geopolitical tension in the region, according to our interest rate poll. All 11 of the analysts and economists we surveyed see the Monetary Policy Committee (MPC) holding rates steady.

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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%. Rates have remained unchanged since 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 then: The central bank hasn’t touched rates since its March rate hike — leaving them as is when it met in May, July, and most recently in September.

Targeting inflation continues to be the priority for the CBE: “The CBE’s primary objective continues to be stabilizing inflation and managing market expectations. While the backdrop of global monetary easing presents an opportunity for potential rate reductions, the CBE is likely to prioritize controlling inflation over any monetary policy easing in response to other economic indicators,” economic analyst Dina El Wakkad said in a note.

Recent inflation data has only added to calls to keep rates where they are: Annual headline urban inflation ticked up for a second straight month, rising 0.2 percentage points from the month before to 26.4% in September, driven by an uptick in electricity, gas, and other fuel prices. This pushed inflation further away from the central bank’s average inflation target of 7% (±2%) by 4Q 2024 and 5% (±2%) in 4Q 2026.

And it looks like these inflationary pressures are here to stay for a while: Increasing fuel prices and the lack of a favorable base effect coupled with the seasonal rise in educational expenses are all factors that could cause inflation to persist during 4Q 2024, Al Ahly Pharos analyst Esraa Ahmed said. IBIS Consultancy economist Ali Metwally agrees, telling us that “the impact of fiscal adjustments, including rising electricity, fuel, medicine, and education prices, will extend into November and December.”

There’s a geopolitical angle: El Wakkad pointed to ongoing geopolitical tensions and regional escalation as another potential factor that could keep inflationary pressures high, as the tensions could potentially affect Brent crude and wheat prices — causing inflation to remain “stubbornly high in the fourth quarter of 2024,” she said.

Analysts pencil in their inflation predictions: Analysts see inflation accelerating for a third straight month in October on the back of continuing price hikes, as well as additional seasonal drivers. HC Brokerage’s Equity Research Head Nemat Choucri expects headline inflation to accelerate 1.0% m-o-m to 26.5% y-o-y in October due to “the electricity price increases to the household, retail, and industrial sectors in September and potentially higher energy prices in October,” she said. Economist Mona Bedair sees inflation ranging between 26.8-27% in October and November, before slowing to 23% by December.

Business activity continues to falter in the meantime: While the record high rates have been a key means of keeping inflationary pressures in check for the CBE, the tightening cycle has come at the expense of GDP growth and Egypt’s business activity, which “remains subdued due to the high interest rate environment impacting private sector investments,” Choucri said. “To overcome this, the government has been announcing investment incentives and tax facilities to encourage private local and foreign investments to drive GDP growth,” she continued.

A decision to hold will have different effects depending on the sector: Continued high interest rates are likely to discourage investment in sectors that rely on borrowing — such as the real estate sector — which could, in turn, slow growth in the sector and reduce demand for raw materials, construction supplies, and other production inputs, economist Hany Abou El Fotouh told us. “On the other hand, the banking sector may benefit from higher interest rates due to increased profit margins on loans, while attracting foreign investments into Egyptian debt instruments, which could stabilize the exchange rate,” he continued.

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