- Egypt is expected to keep interest rates at an all-time high as it seeks to control inflation that has slowed from record highs despite a massive currency devaluation, but it could face pressure from another round of government subsidy cuts, according to Bloomberg.
- Given this caution, all 10 analysts surveyed by Bloomberg expect the central bank to keep its key deposit rate at 27.25% at its second meeting in a row on Thursday, and the first rate cut since 2020 is likely in the fourth quarter, if inflation continues to ease and the U.S. Federal Reserve cuts rates in September.
- “Continued monetary tightening is essential to build policy credibility, restore confidence in the currency and lower inflation expectations. Cutting interest rates at this time would be premature,” said Simon Williams, economist for central and eastern Europe, the Middle East and Africa at HSBC Holdings.
- According to Bloomberg, global investors have been rushing to buy Egyptian bonds since the currency fell by about 40% on March 6, attracted by carry trade returns that exceeded 20%.
- That market could get another boost if Egypt’s inflation-adjusted interest rate eventually turns positive later this year, currently at -0.25% after the central bank’s fourth devaluation of the pound in about two years was accompanied by a 600 basis point rate hike.
- The slowdown in Egypt's consumer price index during last June for the fourth consecutive month is a cause for optimism, as the index got rid of the impact of the historical increase in the price of subsidized bread, to rise at the lowest rate since the beginning of 2023, reaching 27.5% on an annual basis, compared to its highest level at 38% last September.
- This slowdown in inflation, which came after the currency was devalued contrary to what a number of economic analysts had expected, showed the impact of the dollar’s decline against the pound on the local black market on the way retailers set prices for goods, and the parallel currency market in Egypt has been contained for the time being.
- The pace of inflation in Egypt's cities continued to slow in June, for the fourth consecutive month, falling to 27.5% year-on-year, compared to 28.1% in May.
- Some headwinds on inflation could come from the potential phasing out of fuel subsidies and an expected rise in electricity prices later this year, though local investment bank EFG Hermes expects this to have a “relatively small impact.”
- The Central Bank of Egypt indicated in May that it expects a “significant decline” in inflation during the first half of 2025, and the International Monetary Fund expects inflation to slow to 15.3% by the end of the fiscal year in June 2025.
- The Washington-based lender is focusing its $8 billion expanded aid program on continuing to tighten policies, which could give the central bank another incentive to delay any rate cuts until after the IMF executive board discusses the next review of Egypt’s program, which was recently postponed to July 29.
