CBE keeps easing cycle on ice as regional conflict clouds inflation path

The Central Bank of Egypt’s Monetary Policy Committee (MPC) held interest rates at its meeting on Thursday for the second consecutive time, keeping the overnight deposit rate at 19.00%, the lending rate at 20.00%, and the main operation and discount rates at 19.50%, the CBE said in a statement (pdf). The committee cited prevailing and forecasted inflation dynamics amid a challenging external environment as justification for the hold — in line with analyst expectations.

Globally, the CBE flagged modest economic growth weighed down by geopolitical tensions, trade policy uncertainty, and subdued demand. Commodity markets are a particular concern: Brent crude and natural gas prices have risen sharply as regional tensions disrupt energy supply routes, pushing up agricultural prices through higher fertilizer costs.

Balancing act: The CBE is navigating three competing pressures — containing inflation, preserving currency stability, and keeping a lid on debt servicing costs — in what Ahmed Shawky, an industry insider and member of the Egyptian Society for Political Economy, Statistics and Legislation, calls a “smart balancing zone.” A 100 bps hike could “add more than EGP 140 bn to the debt servicing costs, particularly as the government remains the banking sector's largest borrower,” he adds.

Economy seen returning to “full capacity” next year: Real GDP growth eased to 5.0% in 1Q 2026 from 5.3% in 4Q 2025, with the CBE projecting a further 2Q slowdown on the back of regional conflict spillovers. Full-year FY 2025/26 growth is expected to average around 5.0%, with the economy seen converging toward full capacity by 1H 2027.

Deceptively softer inflation: April headline urban inflation eased to 14.9% from 15.2% in March, while core inflation dipped to 13.8% from 14.0%. The CBE attributed the moderation mainly to a pullback in food prices — largely a reversal of seasonal increases — and said the pass-through from March’s fuel hikes appeared contained. Even so, the committee cautioned that inflation is likely to accelerate through 3Q 2026, driven by unfavorable base effects, exchange-rate pressures from the regional conflict, and ongoing fiscal consolidation.

Tight stance remains: The MPC stressed that holding firm on monetary policy is necessary to anchor inflation expectations and leave room to assess any second-round effects from current supply shocks. The CBE now sees inflation exceeding its 7% (±2 pp) target through 4Q 2026 before gradually returning to target in 2H 2027.

Liquidity pressures building: Two forces are tightening banking sector liquidity, head of research at Al Ahly Pharos Hany Genena tells us. “Foreign outflows from the local debt market have reduced liquidity flowing into banks, while the CBE has effectively halted monetary financing of the government for nearly a year and a half now, with net government borrowing from the central bank remaining broadly stable at around EGP 1.9 tn,” he says. Banks are now shouldering a larger share of the government’s financing needs as a result, he adds.

Reserve ratio cut over rate hikes: “Egypt still maintains a relatively high real interest rate of around 4-5%”, giving the central bank room to absorb any temporary inflationary pressures without tightening further, Genena says. He expects no further rate hikes through the rest of 2026, with the CBE more likely to lean on liquidity tools instead — including cutting reserve requirements to the 12–14% range and deploying targeted macroprudential measures at the sector level.

Wait and see: “[If] the Strait of Hormuz reopens relatively soon, officials will probably be content to stay on the sidelines,” Capital Economics’ Jason Tuvey argues. With inflation largely imported and driven by geopolitical factors, a cautious hold is the most appropriate course amid elevated uncertainty, former Banque Misr deputy chair Sahar El Damaty says.

What’s next: The CBE reiterated that future decisions will remain data-dependent, with its stance to be calibrated in line with evolving conditions and inflation trajectory as it keeps 2H 2027 in its sights for a return to target.