HC expects the Central Bank of Egypt to cut interest rates by 21 TP3T at its meeting next Thursday.
In light of the latest developments in the Egyptian macroeconomic and geopolitical situation
HC Securities & Investment's Financial Research Department expects the Central Bank of Egypt to cut interest rates by 200 basis points (2%) at its meeting next Thursday, in light of the latest developments in Egypt's macroeconomic and geopolitical situation.
Heba Mounir, the company's macroeconomic analyst, said that Egypt's external position is witnessing stability, in light of several indicators, including the balance of payments recording a surplus of $489 million in the second quarter of 2024/25, compared to a deficit of $638 million in the second quarter of 2023/24, and a deficit of $991 million in the first quarter of 2024/25. This is mainly due to the recording of net positive errors and omissions amounting to $1.52 billion, although their nature is unclear.
“The banking sector’s net foreign assets also expanded significantly by $4.86 billion month-on-month to $15 billion in March 2025, from $10.2 billion in February, recovering from net foreign liabilities of $4.19 billion last year. This was due to Egypt attracting $2.70 billion in foreign direct investment in the first quarter of 2025, an increase of approximately $151 TP3T year-on-year, receiving a $1.2 billion tranche from the International Monetary Fund under the fund’s $8.0 billion Extended Fund Facility, as well as improved foreign exchange liquidity in banks,” she continued.
Mounir pointed out that net foreign exchange reserves increased by $387 million month-on-month in April 2025 to $48.144 billion, up from $47.757 billion in March. This was mainly due to an increase of approximately 81 TP3T month-on-month in gold, and an increase of approximately 121 TP3T month-on-month in special drawing rights, following the receipt of the $1.2 billion tranche of the International Monetary Fund’s $8 billion Extended Fund Facility. Deposits not included in official reserves also increased by $554 million month-on-month to $11.619 billion in April. Egypt’s one-year credit default swap rate stabilized at 354 basis points, compared to 379 basis points at the beginning of the year.
However, the PMI fell further below the neutral 50-point mark to 48.5 in April 2025, compared to 49.2 in March, due to a decline in consumer spending, she added.
She added that with regard to inflation, April inflation came in close to HC's estimates of 13.8% year-on-year and 1.5% month-on-month, in line with the Reuters median analyst forecast of 13.9%. This was mainly due to the increase in gasoline and diesel prices on April 11 by about 12-15%.
As for treasury bill offerings, interest rates on them witnessed some fluctuations. The latest 12-month treasury bill offering, with a yield of 24.8331 TP3T, reflected a positive real yield of 9.321 TP3T, with an average 12-month inflation expectation of 11.81 TP3T, after deducting the 151 TP3T tax rate for European and American investors. The average expected return required by foreign investors on 12-month treasury bills also declined to 26.31 TP3T from 28.01 TP3T the previous month, based on our calculations, which take into account the narrowing inflation gap between Egypt and its trading partners, according to Mounir.
She continued, "In this context, we see that the attractiveness of returns on government debt instruments has contributed to attracting additional foreign inflows, which justifies the recent 3% rise in the Egyptian pound against the dollar after Trump and China reached an agreement on a 90-day truce with significant reductions in tariff levels."
She added: “From the above, we conclude that the Egyptian economy has been able to contain some inflationary pressures, although they remain above the Central Bank of Egypt’s targets. However, they are on a downward trend, primarily due to the base year effect. Foreign inflows into our government debt instruments remain attractive, and there has been a marked improvement in the banking sector’s net foreign assets position, which reflects a marked improvement in the liquidity and availability of foreign currencies.”
Munir expects the Monetary Policy Committee to cut interest rates by 200 basis points at its next meeting, primarily to stimulate economic growth, taking into account the relative stability in domestic and international economic conditions compared to the previous month.
At its meeting on April 17, the committee decided to cut the key overnight deposit and lending rates by 225 basis points to 251 TP3T and 261 TP3T, respectively, for the first time after raising them by 1,900 basis points since beginning its tightening policy in 2022.
Egypt's annual headline inflation rate rose to 13.91% in April, compared to 13.61% year-on-year in March, according to data from the Central Agency for Public Mobilization and Statistics.
Monthly prices increased by 1.31 TP3T month-on-month, compared to a 1.61 TP3T month-on-month increase in March.
Globally, the US Federal Reserve maintained its target range for interest rates at 4.25-4.501 bps on May 7, a total cut of 100 basis points after raising interest rates by 525 basis points since it began its tightening policy in 2022. The European Central Bank cut its key deposit and refinancing lending rates by 25 basis points on April 17, to 2.251 bps, 2.401 bps, and 2.651 bps, respectively, bringing the total cut to 175 basis points since it began cutting interest rates in June 2024, after raising interest rates by 450 basis points since it began its tightening policy in 2022.
