The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is anticipated to maintain the current key interest rates unchanged until the end of 2024 and to begin reducing interest rates in 2025, according to a new report from American investment bank Morgan Stanley.
The MPC is set to convene on Thursday, July 18, to assess the key interest rates in light of recent developments in macroeconomic indicators, notably the trend in inflation rates, and the performance of the local currency relative to the US dollar.
This upcoming meeting marks the first for the current fiscal year 2024/2025 and the fourth in 2024. Since the beginning of 2024, the CBE has raised key interest rates by 8% (800 basis points).
Holding interest rates steady
Morgan Stanley’s expectation that the CBE will maintain interest rates unchanged until the end of 2024 is based on the recent downward trend in Egypt’s inflation rates. In June, inflation eased for the fourth consecutive month. Egypt’s annual headline inflation decreased to 27.0% in June from 27.4% in May, as reported by the Central Agency for Public Mobilization and Statistics (CAPMAS). Similarly, annual core inflation in Egypt slowed to 26.6% in June, down from 27.1% in the previous month.
However, the report noted that these inflation figures still exceed the CBE’s target range of 7%-9% year-on-year until the end of 2025. Therefore, the report emphasized the need for continued monetary policy tightening for an extended period.
“Stability in the currency and increasing supply of goods should support a downward trend, but potential administered price hikes (e.g. electricity, fuel, pharmaceuticals) imply only a gradual disinflation until year-end, to 26% (Y-o-Y) by end-24,” the report explained.
According to the report’s forecasts, disinflation in Egypt is expected to accelerate significantly starting from February 2025, with year-on-year inflation dropping to 16% by June 2025.
“We anticipate that the CBE will maintain the policy rate at 27.25% until the end of the year, initiating rate cuts in the first MPC meeting of 2025, scheduled for February. This gradual adjustment is aimed at normalizing the ex-post real rate to approximately 3% by the second half of 2025,” stated the report.
Economic reforms
Egypt is engaged in an Extended Fund Facility (EFF) loan program with the International Monetary Fund (IMF) until FY2026/2027, amounting to $8 billion. One of the primary focuses of this program is to address the high inflation levels in the country. Since the onset of the Russian-Ukrainian war in March 2022, Egypt has experienced rising inflation due to global inflationary pressures and prolonged foreign exchange shortages lasting over two years.
The report also highlighted the recent Cabinet reshuffle and the IMF agreement with Egypt, which is undergoing its third review scheduled for discussion on July 29th. Upon approval by the IMF’s Executive Board, Egypt will become eligible to receive a tranche of $820 million.
“With a new Cabinet focused on advancing the structural reform agenda and bolstered by an expanded IMF loan, we are optimistic about Egypt’s prospects for achieving macroeconomic stability,” the report emphasized.
The report further elaborated that the increase in foreign exchange (FX) inflows following the fourth wave of local currency devaluation, enacted by the CBE on March 6th, has positively impacted the CBE’s net international reserves and net foreign assets, despite ongoing pressures on the current account balance.
As of the end of June, Egypt’s net international reserves reached a record high of $46.3 billion. Additionally, Egypt’s net foreign assets (NFAs) surged in May, registering a surplus of $14.3 billion—the first surplus in over two years—compared to a deficit of $3.7 billion in April, according to recent data from the CBE.
Morgan Stanley’s report also highlighted that the monetary policy stance and increased FX flexibility have contributed to stabilizing the US dollar exchange rate in the local market, which in turn has supported the decline in inflation.
