Inflation to ease on easing on base effects

Egypt’s headline inflation expected to ease in early 2025 as base effects kick in after a year of spiralling price pressures.

The Central Bank of Egypt (CBE) has extended its inflation target horizons to the fourth quarter of 2026 and 2028, setting goals of 7 per cent (±2 per cent) and 5 per cent (±2 per cent) on average, respectively.

The move aligns with the CBE’s gradual transition towards a fully-fledged inflation targeting framework.

The CBE’s Monetary Policy Committee (MPC) held interest rates steady at its final meeting of the year on Thursday, keeping the overnight deposit, lending, and main operation rates unchanged at 27.25 per cent, 28.25 per cent, and 27.75 per cent, respectively.

The MPC said in a statement that central banks in advanced and emerging market economies continued to gradually cuttheir policy rates as inflation moderates, while maintaining a restrictive stance to ensureconvergence to target levels.

“Economic growth is broadly stable, with the current pace expected to continue over the medium term, yet still below pre-pandemic levels. However, the outlook is subject to downside risks, including the dampening effect of monetary tightening on economic activity, heightened geopolitical tensions, and the resurgence of protectionism,” read an MPC statement, a copy of which was made available to The Egyptian Gazette.

Economic growth, easing inflation

A number of leading indicators for Q3 and Q4 2024 signalled continued recovery in economicactivity, with estimates indicating that real gross domestic product (GDPgrowth has accelerated compared to Q2 2024.

Egypt’s GDP expanded by three per cent in the fiscal year 2023/24, which ended on June 30. According to MPC, real GDP remains below its potential, supporting the forecasted decline in inflationthroughout 2025, and is projected to realize its full potential by the end of fiscal year 2025/26.

An easing inflation rate is essential for economic growth, as it creates an environment where businesses can thrive and consumers can spend with confidence.

The country’s urban consumer price inflation fell to 25.5 per cent, year-on-year, in November, down from 25.7 per cent a month earlier, according to data from the state-run Central Agency for Public Mobilization and Statistics (CAPMAS).

The country’s core inflation, which is computed by the Central Bank of Egypt (CBE), slipped to 23.7 per cent in November, compared to 24.4 per cent in October. The CBE relies on core inflation as a reference for setting interest rates.

UK-based Standard Chartered expects inflation to average 25-28 per cent through January 2025, before easing on base effects. However, the British bank forecast a steep inflation cliff thereafter, with inflation declining to 13.5 per cent in February. “This should pave the way for the CBE to embark on an easing cycle, given double-digit positive real rates,” read a Standard Chartered report.