The Central Bank of Egypt (CBE) is expected to maintain interest rates unchanged in its meeting on Thursday.
“The Monetary Policy Committee had just raised rates at the last meeting, so they are unlikely to act in the upcoming meeting as it takes time for their actions to filter through,” stated Mohamed Abu Basha, managing director and head of macroeconomic analysis at investment bank EFG Hermes Research.
Since early 2022 the CBE has raised interest rates by 11 per cent.
Abu Basha noted that despite the increase in Egypt’s annual headline inflation in August, the monthly inflation rate had declined. This could encourage the CBE to wait until the previous interest rates hikes have taken effect, he said.
Egypt’s annual headline inflation accelerated to a record 37.4 per cent in August from its previous record of 36.4 per cent year-on-year in July, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS).
However, the monthly inflation rate declined to around 1.6 per cent in August from around 1.9 per cent in July.
“The CBE will most likely keep interest rates unchanged despite the surge in inflation as the series of hikes that started last year haven’t done much in containing inflation. Therefore, the bank will opt for waiting,” economist Hani Abul-Fotouh said.
“I expect inflation to continue on its rising trajectory owing to the persistence of its main causes: the devaluation of the pound and the accumulating backlog of goods at the ports due to the decrease in foreign currency,” he added.
He expected inflation to continue on its rising trajectory to reach more than 40 per cent during the fourth quarter of 2023. He added that inflation might reach 45 per cent by the end of the second quarter of 2024 if the government opts for another devaluation and the privatisation programme is still moving at a slow pace.
The government plans to offer stakes in 35 state-owned companies to strategic investors by the end of June 2024 under its State Ownership Policy Document. The programme has collected $5 billion to date, with another $5 billion in deals in the pipeline.
Under its $3 billion loan agreement with the International Monetary Fund (IMF), Egypt has adopted a flexible exchange-rate system and offered stocks at state-owned companies for strategic investors.
The IMF loan will be disbursed in eight instalments, each preceded by a review. The first review was initially scheduled for March this year, but has not taken place yet.
Abul-Fotouh said the pound is currently set at LE32.65 against the dollar in futures contracts for the next three months and at LE41.5 for the year. Thus, it is not likely to undergo another devaluation before the end of the year, he said
The pound’s exchange rate against the dollar has fluctuated since March 2022 on the heels of the Russia-Ukraine war and has settled at around LE31 per dollar.
Banking expert Mohamed Al-Beih also expected the CBE to hold the current interest rates steady, basing his prediction upon the mild increase in monthly inflation.
“The CBE will be in a situation that would urge it to increase interest rates in the coming period to contain the inflation triggered by a potential currency devaluation next year. Therefore, it is likely to pause tightening fiscal policy for now,” he said.
* A version of this article appears in print in the 21 September, 2023 edition of Al-Ahram Weekly
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