CBE to keep rates unchanged on Thursday, analysts say

MPC to keep rates unchanged in its last meeting of the year, analysts tell EnterpriseAM: The Central Bank of Egypt is expected to once again leave interest rates unchanged when it meets on Thursday, with analysts pointing to ongoing price volatility, mixed signals in inflationary trends, and the depreciation of the EGP against the greenback as factors that could influence the decision, according to our interest rate poll. All ten 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, which was soon followed by the float of the EGP and the approval of a larger loan package from the IMF.

The central bank hasn’t made any changes to interest rates since its March rate hike — leaving them untouched when it met in May, July, September, October, and most recently in November.

The MPC will have to take into account November’s surprising slowdown in inflation: Annual headline urban inflation dropped a full percentage point to 25.5% in November, marking the first fall in inflation in three months and Egypt’s lowest inflation reading since December 2022.

Analysts see this slowdown in inflation carrying over to next month: “Inflation is on a gradual downward trajectory, with more pronounced declines expected by February 2025,” economist Mona Bedair told us. Meanwhile, HC Securities’ Heba Mounir said that her firm expects December’s inflation reading to “decelerate to 24.1% y-o-y and 0.2% m-o-m, on the back of relatively lower to stable vegetable and fruit prices.”

But other pressures may prompt the CBE to hold off on rate cuts just a bit longer: Multiple analysts noted that inflationary pressures remain on the horizon — November’s unexpected drop in inflation notwithstanding. “[November’s] decline was mainly driven by vegetable items — namely tomatoes — which are not core inflation items. Also, some price hikes such as the recent telecom hikes are still passing through inflation readings, which might hinder a considerable decline in the annual inflation reading in December,” Al Ahly Pharos senior analyst Esraa Ahmed told EnterpriseAM. In addition, anticipated increases in fuel and electricity prices could spur further inflation, with rate cuts poised to “increase inflationary pressures and hinder the central bank’s plan to reduce the inflation rate to its target levels,” economist Hany Abou El Fotouh told us.

The depreciation of the EGP against the USD will also create some inflationary pressures, EGBank board member Mohamed Abdelaal told us. This, alongside an unfavorable geopolitical environment, provides another reason for the CBE to hold off a bit before hitting the easing button, Ahmed said.

Our continued reliance on hot money may also throw a wrench into the MPC’s decision: “High interest rates contribute to attracting foreign capital to government debt instruments such as treasury bills, supporting FX reserves,” Abou El Fotouh noted, adding that lower interest rates could lead to foreign capital outflows, putting pressure on the exchange rate. Indeed, outflows are already contributing to a more complicated FX outlook, Bedair said.

Most analysts still see the bank cutting rates in the first quarter of next year: Analysts were mostly in agreement that the CBE would begin cutting rates in 1Q 2025, with some adding the caveat that inflation rates must continue to decline sustainably while the EGP exchange rate stabilizes. However, “the cumulative impact of monetary tightening decisions and the positive base effect” are collectively expected to prompt the bank to begin loosening rates by the first quarter of next year, Abou El Fotouh said.

Not everyone’s so sure, however: Ostoul Securities Brokerage’s research head Mohamed Abdel Hakim provided a dissenting view, telling us he believes the CBE “will start cutting interest rates during the second quarter of 2025,” citing “the base effect and inflationary pressures resulting from fiscal tightening measures” as among the reasons for the delay.