The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene on Thursday to review key interest rates for the fourth time since the beginning of the year.
The meeting comes amid expectations that the MPC will keep the current rates unchanged.
In making its decision, the MPC takes into consideration the latest macroeconomic developments, especially inflation trends, as well as the performance of the local currency against the dollar. It also reviews the latest global economic developments.
“The MPC is likely to maintain current key interest rates unchanged, as inflation is on the decline,” banking expert Ahmed Shawki told Al-Ahram Weekly.
For the fourth month in a row, Egypt’s headline annual inflation kept to its downward path in June, cooling to 27.1 per cent compared to 27.4 per cent in May, according to the latest readings published by the Central Agency for Public Mobilisation and Statistics (CAPMAS).
Core inflation rates eased in June for the fourth consecutive month to 26.6 per cent, down from 27.1 per cent recorded a month earlier, according to CBE calculations.
Since the beginning of 2024, the CBE has hiked key interest rates by eight per cent (800 bps), bringing the total increases it has applied since March 2022, when the Russia-Ukraine war erupted, to 19 per cent (1900 bps).
In its last meeting held in May, the CBE kept the overnight deposit rate, overnight lending rate, and the rate of main operations unchanged at 27.25 per cent, 28.25 per cent, and 27.75 per cent, respectively. It also maintained the discount rate unchanged at 27.75 per cent.
The CBE has withdrawn a huge amount of liquidity from the market and is encouraging the banks to control their lending and financing activities as part of the tightening of monetary policies to contain inflation, Shawki said.
“Keeping key interest rates at their current levels is also important so as not to raise the debt-servicing burden on the budget,” he added. A one per cent increase in interest rates costs the budget around LE30 billion, according to some estimates.
Shawki expected the CBE to start easing its monetary policy tightening by the end of 2024.
BMI, a Fitch Solutions company, also expected the CBE to keep the current key interest rates unchanged until the end of 2024 in response to the downward path of inflation, according to the BMI’s latest report on the Middle East and North Africa (MENA) macroeconomic outlook for the second half of 2024 and for 2025.
Speaking to Ahram Online, Ramona Moubarak, head of MENA Country Risk and Global Banking at BMI, said inflation would average about 27 per cent during the second half of 2024 and would slow to 18 per cent in 2025.
However, she said increases in administered prices such as for fuel and electricity would keep it above the CBE’s upper inflation target range of nine per cent.
In line with Egypt’s $8 billion loan deal with the International Monetary Fund (IMF), the CBE has committed to taming the inflation rate to reach seven per cent (±2 per cent) in the fourth quarter of 2024 and to five per cent (±2 per cent) in the fourth quarter of 2026.
Along the same lines financial analyst and economist at HC Securities and Investments Heba Mounir said she expects the MPC to maintain the overnight deposit and lending rates at its upcoming meeting.
According to Mounir, this expectation is supported by lower inflation rates and improved foreign-exchange liquidity following the Ras Al-Hekma investment deal, which helped increase Egypt’s net international reserves (NIR) by 33 per cent (year-on-year) and 0.6 per cent (month-on-month) to an all-time high of $46.4 billion in June.
It is also supported by the reversing of the net foreign liabilities (NFL) position of the banking sector of $29 billion in January into a net foreign assets position (NFA) of $14.3 billion in May and the improvement in Egypt’s one-year credit default swap (CDS) to 303 bps from 857 bps on 1 January, along with the recent improvement in Egypt’s credit outlook by the ratings agency Moody’s to positive from negative and to positive from stable by Fitch and S&P.
On a similar note, the US investment bank Morgan Stanley expected the CBE to keep the policy rate on hold at its Thursday meeting, projecting it to start rate cuts in February 2025.
In its note on Egypt released this week, the US bank explained that while inflation declined for a fourth consecutive month in June, it remained above the CBE’s target band of seven to nine per cent and thus required a tight monetary stance for longer.
The stability of the currency and an increasing supply of goods should support a downward trend, but potential administered price hikes for items such as electricity, fuel, and pharmaceuticals imply only a gradual disinflation to 26 per cent until the end of 2024, the investment bank said.
It said that inflation is projected to decelerate starting from February 2025, given large base effects, reaching 16 per cent (year-on-year) by June 2025. “We expect the CBE to hold on to the 27.25 per cent policy rate until the end of 2024 and to start rate cuts in the first MPC meeting of 2025,” the note said.
* A version of this article appears in print in the 18 July, 2024 edition of Al-Ahram Weekly
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