CBE lifts growth forecasts as economy withstands regional shock

The country’s economy is proving more resilient than expected in the face of the Iran-US conflict, prompting the Central Bank of Egypt (CBE) to slightly raise its growth forecasts and lower its near-term inflation projections, according to its latest Monetary Policy Report (pdf). The CBE now sees real GDP growth at 5% in FY 2025/26 and 4.9% in FY 2026/27, up 0.1 percentage points from its previous forecasts for both years, before growth accelerates to 5.4% in FY 2027/28.

Inflation will remain elevated for some time: Headline inflation averaged 14.6% in 2Q, slightly below the CBE’s previous 15% forecast, and is expected to temporarily accelerate in 3Q on unfavorable base effects before resuming its decline. The CBE sees inflation averaging 16.6% in FY 2026/27 under its baseline scenario, before falling to 8.1% in FY 2027/28 and aligning with its 7% ±2 percentage point target range during 2H 2027.

A better-than-expected Suez Canal recovery is helping the growth outlook: The CBE attributed part of its growth upgrade to stronger Canal activity than was assumed in its previous forecast, with Suez Canal receipts rising 29% y-o-y in 1Q. Manufacturing and services, particularly tourism, are expected to remain key growth drivers, while the extraction sector is projected to improve on higher oil and gas production in FY 2027/28.

External buffers weathered the geopolitical shock: Net international reserves rose to USD 55.1 bn at the end of June from USD 52.8 bn in March, while the banking system’s net foreign assets recovered to USD 22.9 bn in May from USD 21.4 bn in March. The EGP also strengthened to 49.2 against the greenback at the end of June from 54.6 three months earlier. The improvement came despite USD 9.5 bn in portfolio outflows following the outbreak of the regional conflict in late February 2026.

The current account remains a weak spot: The deficit more than doubled y-o-y to USD 5.1 bn, or 1.2% of GDP, in 1Q 2026, driven by wider hydrocarbon and non-hydrocarbon trade deficits and a widening net investment income deficit. Higher remittances, stronger tourism, and Suez Canal receipts helped cushion the deterioration, while the overall balance of payments managed to record a marginal USD 0.3 bn surplus.

How a weaker EGP feeds into inflation: The CBE estimates that every 1% depreciation of the EGP raises annual headline inflation by around 0.18 percentage points on average during the first year after the shock, with the impact peaking roughly three quarters later. The pass-through to core inflation is slightly higher at 0.2 percentage points. The central bank also suggests that the shift toward a more flexible exchange rate regime could mean lower exchange-rate pass-through going forward.

The CBE isn’t declaring victory just yet: The MPC kept rates unchanged at its May and July meetings, maintaining what it described as an “adequately tight” monetary stance to keep inflation on track toward its target. Geopolitics remains the key swing factor: The CBE sees FY 2026/27 inflation averaging 15.2% under its de-escalation scenario and 17.8% if the conflict intensifies, compared to 16.6% under the baseline, underscoring why policymakers remain cautious despite the stronger growth, FX, and reserves outlook.

The decision is due today, when the MPC holds its fifth meeting of the year to decide on interest rates, after keeping rates unchanged at its past three meetings. July’s 14.9% annual urban inflation reading — its first rise since March — came in below analysts’ expectations, but the roughly 12% household electricity-tariff increase announced that month has yet to fully filter into the data.

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