Central bank holds interest rates in line with expectations

Steady, as she goes: The Central Bank of Egypt left record high interest rates unchanged on Thursday, it said in a statement (pdf), citing upside risks to the nation’s inflationary trajectory and stable economic growth. “The current policy rates remain appropriate to maintain the prevailing tight monetary stance until a significant and sustained decline in inflation is realized,” the bank said.

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Where rates stand: The Monetary Policy Committee (MPC) kept the overnight deposit rate at 27.25%, the overnight lending rate at 28.25%, and the main operation and discount rates at 27.75%.

Four in a row: Rates have remained unchanged since the committee delivered a 600 bps ratehike 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 now remained unchanged for four consecutive MPC meetings — the committee left rates untouched when it met in May, July, September, and most recently last week.

The gradual cooling of inflation is far from guaranteed: Despite a global cooling of inflation and growing confidence at home that inflation’s on a downward trajectory, upside risks remain, according to the CBE. The bank referred to international commodity prices — especially for energy — as having shown “volatility due to supply chain disruptions, stemming from geopolitical tensions, and adverse weather conditions.”

This concern makes sense — inflation accelerated for two consecutive months in September: Expectations that the bank would hold off on rate cuts were only bolstered by the country’s most recent inflation data showing inflation accelerating in September for a second consecutive month. Despite a fall in food and beverage price inflation, an increase in the prices of gas, electricity, and fuel drove the rate of inflation up throughout the month — and over the weekend we got news of another fuel hike.

But the overall picture is far from gloomy: Although annual headline urban inflation ticked up 0.2 percentage points from the month before to 26.4% in September, the figure still places the rate of inflation a whole 11.6 percentage points below the record 38.0% recorded during the same period last year. The bank thinks that the downturn in food inflation and improved inflation expectations show that inflation “remains on a downward trajectory, albeit restrained by the drag of fiscal measures,” adding that inflation is expected to stabilize in 4Q 2024 and begin declining again in 1Q 2025.

Keeping up economic growth is also a consideration: Although the bank describes the nation's economic growth as “broadly stable,” it cautions that it is still susceptible to the “dampening effect of monetary tightening.”

The CBE’s assessment is backed up by the data: S&P Global’s most recent Egypt Purchasing Managers Index (PMI) report showed activity in the country’s non-oil private sector falling back into contraction in September after having been in the green for the first and only time since November 2020. Business activity is now at its lowest since April.

All the analysts we spoke to were on the money: The 11 analysts and economists polled byEnterpriseAM last week forecasted the CBE’s decision to keep rates unchanged, pointing to inflationary pressures and growing geopolitical tensions. “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.

Some corners of the international press also picked up the story: Bloomberg, who EFG Hermes’ Mohamed Abu Basha told that authorities are in no rush to cut rates at the moment as they are probably cautious of a “potential second-round effect from energy-price rises.”