CBE hikes for the first time since March 2024, raising rates 100 bps and moving its inflation target to 4Q 2027

The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) raised key policy rates by 100 bps on Thursday, the first increase since March 2024 and the first reversal of an easing cycle that had cut 825 bps in six moves from April 2025. The overnight deposit rate goes to 20.0% from 19.0%, the overnight lending rate to 21.0% from 20.0%, and the main operation and discount rates to 20.5% from 19.5%, according to the CBE’s statement (pdf).

Why didn’t easing inflation buy another hold? The CBE cited monthly inflation, rather than annual. Although annual headline inflation eased to 13.9% and core to 14.1%, headline prices rose 1.3% m-o-m in September after 0.1% in August, and core prices 0.8% after 0.3%, the CBE said, driven mostly by core food and seasonal effects.

The MPC called the move “preemptive,” aimed at anchoring expectations and containing imported price pressures before they reach domestic prices. It also dated the payoff further out: convergence on its 7% (±2 percentage points) target is now “on average, in [4Q] 2027,” against “during 2H 2027” in the September meeting, a narrower promise than the one it was making while holding.

What the statement changed

The bigger change is how much risk the CBE will tolerate, which is evident in the wording. In September, it left rates alone because the current degree of restrictiveness “serves as a buffer” against the risks it had listed; on Thursday, it said those risks had become “more pronounced relative to the previous MPC meeting” and that preserving the disinflation path warranted “a more restrictive stance” than the one it had previously described as adequate. And language it had retired came back: September dropped the reference to returning inflation to target “in the near term” and stopped framing policy around a positive real-rate margin; on Thursday, “in the near term” was restored.

The argument about demand hasn’t changed. The CBE still says output is below potential and that demand-driven pressures “should remain limited in the short term,” the same reasoning it used in September to justify standing still. Read together, the two statements say the economy does not need tighter money, while the exchange rate and expectations do.

The EGP is absent from the statement. The MPC cites “risk-off sentiment,” tighter global financial conditions, and imported inflation, but not the exchange rate, so the link between the currency and this decision is ours to draw.

And the market has already drawn it. The EGP crossed 55 to the USD for the first time on Thursday, 22 October, above the previous record low of 54.73 set on 7 April. Then it hit 55.89 at the CBE last Sunday and broke 56 by Tuesday. The CBE’s selling rate closed Thursday at 56.12, but this reading was taken before the MPC’s afternoon announcement, so it shows the pressure the committee was reacting to. Stocks steadied on the day of the hike, with the EGX30 closing 0.64% higher at almost 49.6k and recovering part of the 3.56% it lost last Sunday, 25 October.

Foreign investors have kept selling, most of it concentrated in a single week. On the EGX’s weekly reports, they net sold EGP 115.1 bn of treasury bills and bonds in the week of 18-22 October (pdf) (about USD 2.05 bn at the EGP’s current rate, by our math). That followed EGP 14.7 bn in net buying in the week of 11-15 October (pdf) and selling worth EGP 15.8 bn in the week of 4-8 October (pdf). That leaves October-to-date net foreign selling at about EGP 116.2 bn, or roughly USD 2.07 bn across the three published weeks. The exchange hasn’t posted the week of 25-29 October, which covers the rate decision and the day the House voted to authorize the president to take “whatever measures are needed” to support Saudi Arabia in its current military conflict.

Still, the T-bill market had plenty of buyers on the day of the hike. At the 29 October auction, the 364-day line was sized at EGP 80 bn and drew EGP 152.5 bn in bids, of which EGP 56.3 bn was accepted, while the 182-day line drew EGP 65.4 bn against an EGP 30 bn size, with EGP 22.5 bn accepted, the CBE’s results show. Bids covered both sales about twice over, so the state left most of that demand untaken; by our read, the constraint was price rather than appetite, and the clearing yields were 25.46% on 182 days and 26.08% on 364 days, 5.5-6.1 pp above the 20.0% deposit rate the MPC had just set.

What the ins. costs

The real rate has widened to a level the budget feels. At 20.0%, the deposit rate now sits 6.1 pp above September’s headline inflation, up from 5.1 points before the meeting, by our math, and the 21.0% lending rate is 7.1 points above it. Those rates already exceed nominal GDP growth, and interest payments absorb about 60% of central government revenue even with a primary surplus, Al Ahly Pharos’s Hany Genena told us ahead of the decision.

DATA POINT- Interest payments reached EGP 512.2 bn in July and August, up from EGP 478.8 bn in the same two months a year earlier, the Finance Ministry’s October monthly report (pdf) shows. That’s before this week’s increase reaches the debt stock.

A hike buys the wrong kind of money, Genena argued last week. Compensating foreign investors for currency risk is “expensive to execute,” he said, and even if higher rates drew money in, banks would likely hold it abroad as net foreign assets rather than convert it, leaving the current account no better off. And the cost would fall hardest on mid-size and small developers that depend on project finance and are already selling slowly.

Two others in our poll made a similar case from the inflation side. A hike does little against prices pushed up by global costs, economist Iten El Marghoushy argued, and the buffer only holds while foreign currency keeps coming in. Banking expert Sahar El Damaty traced the problem to supply: foreign currency is running well below demand, with Red Sea shipping and ins. costs hurting exports, tourism, and Suez revenue, and higher US rates pulling portfolio money away.

Who saw it coming

Only one of the analysts we polled expected this. Maged Fahmy, the former Industrial Development Bank chairman, argued for a hike on the grounds that it would slow hot-money outflows and keep local debt attractive against competing markets, with a stronger USD raising Egypt’s foreign-currency needs on top of its import bill. The decision went his way, though the statement gave imported inflation and expectations as its reasons.

The hold camp had a coherent case too. EFG Hermes’s Mohamed Abu Basha expected the freeze on fuel prices “will keep inflation contained,” and judged the weaker EGP a risk, “but it’s too early amidst the ongoing volatility and the geopolitical risks.” CI Capital’s Monsef Morsy pointed to the last two monthly inflation prints and the indexation committee’s decision to hold oil product prices until December, the same reason Abu Basha gave.

The arithmetic case for standing still came from HC Securities’ Heba Monir — a 364-day T-bill yielding 25.91% returns about 10.5% in real terms after the 15% tax on European and US investors, measured against her 11.5% inflation forecast for 2027. On her numbers, the fuel freeze cut her average inflation call for 4Q 2026 to about 13% from 14.5%, while she raised 2027 to 11.5% from 10.9%. By our read, that’s a slower descent than the CBE’s new 4Q 2027 target implies.

Deutsche Bank, which also expected a hold at 19%, named the currency as the one thing that could change its mind, and had already raised its end-2026 inflation forecast to 15.7% from 14.7%. It sees easing resuming in 1Q-2Q 2027 rather than sooner, a timetable the hike makes more plausible than it was on Monday.

Abroad, conditions are moving against the EGP as well. The US Federal Reserve raised 25 bps in September to 3.75-4.00% and held on 28 October, with two members of the Fed’s Open Market Committee dissenting in favor of a further increase. BMI sees Brent trading above USD 100 a barrel into 2027 against the USD 75 the government assumed in its budget. Each of those makes the EGP harder to hold without paying more for it.

What’s next: The MPC meets again on 17 December, and an IMF mission is in Cairo for the eighth and final review of the USD 8 bn Extended Fund Facility and the last review under the Resilience and Sustainability Facility, worth about USD 2.3 bn between them. The aim is to reach a staff-level agreement and bring both reviews to the Fund’s executive board before the EFF expires on 15 December, with a final disbursement of about USD 2.33 bn, the Fund’s communications director said on Thursday.

What the Fund wants is on the record, and it overlaps with what the CBE just did. The reviews will focus on “maintaining a tight monetary policy” and the fiscal consolidation plan, with stronger revenue mobilization to reduce debt vulnerabilities. They will also assess progress on structural reforms, including accelerating the divestment program, implementing the state ownership policy, leveling the playing field, and strengthening governance at state-owned companies.

The test in December is narrow — whether monthly inflation cools and the EGP holds around 56. Reserves give the CBE room to wait (net international reserves reached USD 57.35 bn at end-September), but that cushion, like the rate one, depends on inflows continuing. The EGP closed the week at 56.12, and the first full session since the decision is today’s, so nothing yet says the hike is working.