Experts are unanimous that the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) will not cut interest rates in its upcoming meeting on Thursday.

“We expect the MPC to leave interest rates unchanged at its upcoming 21 November meeting,” investment bank HC Securities said in a note on Monday.

“The third successive rise in Egypt’s headline inflation rate has all but quashed hopes that the Central Bank will cut interest rates before the end of this year,” a note by Capital Economics, a UK-based research house, said.

Egypt’s annual headline inflation registered 26.5 per cent year-on-year in October from 26.4 per cent in September, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS).

It rose 1.1 per cent month-on-month compared to 2.1 per cent in September. Fuel hikes in October have yet to be fully factored into the November inflation figure, experts add.

Only when inflation is brought under control will the CBE begin to cut rates, Moustafa Assal, director of Bondlink, a company specialising in fixed income investments, told Al-Ahram Weekly.

The CBE has an inflation target of between five and nine per cent.

In addition to providing a predictable view about inflation expectations, interest rates could be kept high partly to fight dollarisation, possibly provide an income to the household sector in the form of certificates of deposit, and absorb liquidity from the market to reduce inflation, Reham ElDesoki, an economic and investment consultant, explained to the Weekly.

“Numerically, inflation could start declining as of February 2025 — the February inflation figures are released in March — because of the base year effect,” ElDesoki said. “The CBE could refrain from cutting interest rates before inflationary pressures expectations and second-round effects from subsidy restructuring start dissipating,” she added.

On a similar note, Heba Monir, an economist and financial analyst at investment bank HC Securities, said that the bank estimates easing monetary policy rates to begin by 2025. She told the Weekly that she expected around 500 basis points to be subtracted throughout the year.

Over the past two years, the CBE has hiked interest rates by 19 per cent. “We forecast the interest rate cut to be slower, possibly extending until 2027 and 2028,” Monir said.

Monir also confirmed that the interest rate cuts will depend on the decelerating pace of inflation, enhanced by the favourable base-year effect, despite the increasing month-on-month rates.

A factor that could help to cool inflation, according to ElDesoki, is that there will be no increase in fuel prices for six months, according to an announcement by Prime Minister Mustafa Madbouli, which would be a window for the CBE to cut interest rates.

Madbouli made the announcement following the latest hike in fuel prices on 18 October, saying that the government was aware of the impact of higher fuel prices on the population.

The hold on fuel-price increases reduces the risk of unexpected upward price pressures on inflation, explained Capital Economics. They expect the headline rate to slow towards 20 per cent year-on-year by the end of the fourth quarter.

According to Monir, a decision to cut interest rates also depends on foreign-currency inflows showing resilient momentum from remittances and tourism, offsetting the drop in Suez Canal revenues caused by geopolitical tensions and the trade deficit because of higher petroleum imports.

Keeping interest rates high also maintains the interest rate differential for the carry trade. Those flows could be important to partially finance short-term financing needs, ElDesoki said. Carry trade investors are attracted by Egypt’s high interest rates, as they convert their currency into Egyptian pounds to buy Egyptian treasury bills.

Investors in Egypt’s debt came back strongly following the $35 billion deal to develop the coastal city of Ras Al-Hekma by the UAE, followed by the $8 billion Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF) in March, Assal noted.

According to CBE data, foreign investments in local treasury bills surged in March by around 140 per cent to reach $32.7 billion, compared to $13.6 billion the month before.

Since then, he said, investors have been reassured by Egypt’s adherence to reforms and the building up of international reserves. Egypt’s reserves have been steadily rising, reaching $46.9 billion in October.

However, Assal noted that investors are always on the lookout for any escalation in geopolitical tensions when making investment decisions.

Other external factors also have a bearing on interest rates. While many observers had been betting on the US Federal Reserve cutting rates going forward, Assal said that this might not happen quickly under the incoming Trump Administration.

Lower interest rates on the dollar would enable the CBE to cut rates on the pound as well without losing its attractive interest rate differential, he said.

The Fed has recently begun to ease its tight monetary policy, which began in March 2022. It raised rates to a peak of 525 basis points in July 2023. In 2024, it cut rates by 75 basis points, including 25 basis points on 7 November, and lowered its benchmark interest rate to a range between 4.5 and 4.75 per cent.

However, President-elect Donald Trump, who takes office in January, has promised tax cuts and high tariffs on all imports and threatened to interfere in the Fed’s independent rate decisions, Assal said, and this could cause inflation to surge, meaning that the Fed could slow or halt its rate cuts.

* A version of this article appears in print in the 21 November, 2024 edition of Al-Ahram Weekly