Most analysts agree that the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) will keep interest rates on hold at its 23 May meeting, citing positive economic developments since its last meeting two months ago.

On 6 March, the CBE unexpectedly hiked rates by six per cent in a step linked to its decision to float the pound on the same day.

Interest rates are one of the monetary policies used to control inflation and support the local currency. As inflation is easing and the value of the dollar in the parallel market rate is converging with the official rate, it is likely that the CBE will opt to hold rates unchanged for the time being, according to economists.

The positive news is largely due to the influx of funds from the Ras Al-Hekma deal as well as the delivery of delayed tranches from the loan Egypt has negotiated with the International Monetary Fund (IMF).

Egypt’s annual inflation rate declined for the second consecutive month in April to settle at 32.5 per cent, down from 33.3 per cent in March. The downtick came on the back of easing food and beverage inflation, which declined in April to its lowest level since December 2022, settling at 40.5 per cent compared to the 60 and 70 per cent seen in some months of 2023.

Ali Metwally, an economic consultant at the UK-based IBIS Consultancy, said that part of the retreat in the inflation rate is due to the absorption of excess liquidity using the monetary policy instruments available to the CBE, such as issuing certificates of deposit (CDS) and treasury bills and bonds.

The two largest public-sector banks issued CDS with rates reaching 30 per cent on the same day as the floatation. Foreign investors are also regaining their appetite for the country’s treasury bills and bonds as a result of higher interest rates.

“Cutting rates now will weaken the pound and push inflation higher. It will also trigger foreign-exchange outflows,” Metwally said.

The MPC hiked the benchmark overnight deposit and lending rates by six per cent on 6 March in a special meeting to 27.25 per cent and 28.25 per cent, respectively, bringing the total rate hikes since 2022 when it started a tightening policy on the back of the repercussions of the war in Ukraine to 19 per cent.

This includes three per cent in 2022, eight per cent in 2023 and eight per cent since the beginning of 2024.

According to Heba Mounir, a macroeconomic analyst at HC Securities, the decline in rates for treasury bills reflects a rebound in foreign holdings of Egyptian treasuries by around $11 to $12 billion to 8 April, according to banking sector sources, following the CBE’s decision to allow market forces to determine the foreign-exchange rate and the Ras Al-Hekma deal and resumed IMF programme.

Rates on 12-month treasury bills declined to 25.9 per cent from their peak of 32.3 per cent in March, according to Mounir.

The strong return of portfolio investments to the market strengthens the pound and makes another hike in interest rates unneeded. Funds from the Ras Al-Hekma deal, as well as the delayed second and third tranches of the IMF loan, increased Egypt’s net international reserves to $41.1 billion in April, 19 per cent higher than their level in April 2023.

Metwally offered another reason for keeping the rates unchanged. “In the light of the IMF agreement, according to which Egypt is committed to limit resorting to the CBE’s overdraft facility, as well as the shift in the monetary system to target lowering inflation rather than growth, inflation is expected to continue to decline gradually,” he said.

He expected inflation to reach 28 to 29 per cent in the last quarter of this year and 12 per cent in the fourth quarter of 2025, meaning the CBE’s inflation target may be achieved by the end of next year or the beginning of 2026.

The CBE targets seven per cent (±2 per cent) on average in the fourth quarter of 2024.

Mounir also mentioned the international rating agencies’ upgrade of their outlook for the Egyptian economy as an important development that will give the CBE some room to hold rates at their current level.

The outlook was upgraded by Moody’s to positive from negative and to positive from stable by both Fitch and S&P.

The US Federal Reserve in early May also maintained interest rates at their current range of 5.25 to 5.5 per cent after it had hiked rates by a total of 5.25 per cent since 2022. “We won’t see a rate cut before the US Federal Reserve starts reversing its aggressive monetary tightening policy,” Metwally said.

He explained that “if we see a decrease in interest rates in the US before the end of the year, this will greatly help Egypt stabilise not only the currency but also prices.”

As a result, there may be no need to keep interest rates at a high level because part of keeping them high is the interest rate differential, or interest rate differences between Egypt and other countries, especially the US, because any small increase there is offset by a large increase in Egypt to remain attractive to investors.

However, Metwally said there are potential risks to inflation expectations. These include food price shocks, renewed exchange-market pressures, and the potential impact of further adjustments to fuel prices which, if increased further as expected, may keep inflation at a high level until the end of the year.

Under the Fuel Price Indexation Mechanism, Egypt adjusts fuel prices every three months to keep them in line with international prices. The prices of different kinds of fuels were increased by eight to 21 per cent in early April.

* A version of this article appears in print in the 23 May, 2024 edition of Al-Ahram Weekly