Goldman, Deutsche Bank split on our rate cut pace: Goldman Sachs sees no interest rate cuts in Egypt before October, while Deutsche Bank is pencilling-in a 200 bps cut in August, but highlights inflation risks that could influence the Central Bank of Egypt’s decision at the time, according to recent research notes from both banks seen by EnterpriseAM.

What changed? Goldman Sachs now expects the CBE to cut interest rates by 400 bps in 4Q this year, up from its prior estimate of a 300 bps cut. This puts its year-end policy rate forecast to 20% from a previous estimate of 18%.

Before we dive deeper:The CBE decided earlier this month to leave interest rates unchanged in its fourth meeting of the year. The move marks a halt in the Monetary Policy Committee’s (MPC) easing cycle, after it cut rates by 225 bps in April and 100 bps in May. The overnight deposit rate now stands at 24.00%, the overnight lending rate at 25.00%, and the main operation and disc. rates at 24.50%.

The culprit is inflation: Goldman Sachs still anticipates the country’s inflation to dip to around 13% y-o-y by the end of the year, but it sees a spike in the headline inflation rate to reach about 16% y-o-y within the next couple of months, citing two main factors: a rise in cigarette prices this month and an increase in energy rates “planned in the coming weeks,” according to the global investment bank. Our annual headline urban inflation fell to 14.9% in June, from 16.8% in May, ending an upward trend that extended over three consecutive months.

ICYMI– President Abdel Fattah El Sisi ratified on Thursday amendments to the VAT Law, which will impact the prices of several key goods and services, including crude oil and cigarettes.

Speaking of energy prices, the government hiked fuel prices at the pumps in April for the first time in 2025, raising fuel prices by 11.8-14.8%. Meanwhile, two government sources told us in May that the government could push back the electricity price hike planned for this summer.

Deutsche Bank sticks to rate cuts outlook, but cautions on inflation: Deutsche Bank still maintains its forecast of a 200 bps rate cut for the MPC’s upcoming meeting on 28 August. However, it noted that July’s inflation reading is crucial in determining the “extent to which the CBE will have room for such a substantial cut.”

Deutsche Bank echoes Goldman’s year-end policy rate forecast: Deutsche Bank expects the CBE to continue its cautious approach to monetary policy throughout the rest of the year, anticipating “a cumulative 725 bps of rate cuts in 2025, taking the policy rate to 20% by year-end.” This outlook is set against an average projected inflation rate of 15-16% y-o-y, Deutsche Bank noted.

Looking at the risk landscape, Deutsche Bank highlighted some upside risks, mainly through exchange rate pass-through. This could happen if global and geopolitical uncertainty — such as the recent emerging markets sell-off or a possible drop in Suez Canal revenues — adds more pressure on the EGP. On the flip side, the bank identified some downside risks that could come from prolonged food deflation, similar to what happened in June. However, this is unlikely to occur without substantial government subsidies and price caps, according to the research note.

Higher for longer rates could recharge the EGP carry trade inflows: The CBE’s stance to keep interest rates higher for longer is expected to strengthen market dynamics and boost portfolio inflows in the EGP carry trade in the coming months, Goldman Sachs noted. This assumes no significant escalation in regional risks. The CBE’s policy, combined with a disinflationary environment, should keep real interest rates in Egypt high until at least the 4Q of this year.

EGP carry trade gets green light from Goldman: “We expect the high-real-rates/high-carry backdrop to be sustained until October, at least, and therefore think there is currently an attractive level for investors to re-enter the long EGP carry trade,” Goldman Sachs noted.

Goldman estimates that Egypt’s ex-ante real overnight interbank rate stands currently at around 12%, which is considered one of the highest in the frontier and emerging market high-yield space. This strong position is also reflected in the 12-month nominal FX carry trade, which exceeds 15% currently, again ranking among the highest frontier and emerging market high-yield currencies, the bank noted.

Strong inflows + robust reserves to bolster EGP: Goldman Sachs believes the EGP spot rate will be supported by anticipated strong portfolio inflows. This outlook is also underpinned by strengthened international reserves, which provide an additional layer of support for the EGP’s stability. Another aspect is that our local currency remains significantly undervalued.

Let’s dive more into this: The EGP is currently the second most undervalued currency among frontier FX Goldman Sachs covers, at about 30%. The investment bank estimates that the EGP is likely to remain undervalued at 25% over the next 12 months, if the current exchange rate stabilizes near its current level. The EGP is currently trading at EGP 49.3 against the greenback for buying, and at EGP 49.4 for selling.

It is not all negative: With these factors, Goldman Sachs is once again recommending the long EGP trade recommendation. “We had previously recommended long EGP between March and October 2024, and think the current setup looks attractive again. We thus initiate a trade recommendation to go short USD/EGP, with a total return target of 5% and a stop-loss of -2.5%,” the bank wrote in its research note.

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