Why CBE kept interest rates steady

As widely expected, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has kept overnight interest rates unchanged, forecasting inflation topersist near current levels until the end of 2024.

The MPC has left the deposit and lending rates steady at 27.25 and 28.25 per cent, while the main operation and discount rates total 27.75 per cent each. The MPC said in a statement that inflation would ease appreciably as ofthe first quarter (Q1) of 2025, as the cumulative impact of monetary policytightening and favorable base effect materialize.

“Looking ahead, inflation is expected to persist near current levels till the end of 2024 with the balanceof risks still tilted to the upside. These risks include geopolitical tensions, possible tradeprotectionism, and higher than anticipated pass-through of fiscal measures,” the MPC statement read.

Controlling inflation is key to sustainably lowering domestic interest rates and thereby reducing the government’s interest bill.

Urban consumer inflation rose to 26.5 per cent in October, up from 26.4 per cent a month earlier, according to data from the state-run Central Agency for Public Mobilization and Statistics (CAPMAS).

Egypt’s core inflation, which takes out fruit, vegetables, and energy from calculating consumer inflation, slid to 24.4 per cent in October, down from 25 per cent in September, according to CBE data.

Global impact

The MPC said monetary policy tightening cycles in advanced and emerging market economies havecontributed to a decline in inflation worldwide, with select central banks gradually cutting theirpolicy rates, albeit maintaining a restrictive stance to sustain disinflation towards targeted levels.

Earlier this month, the Federal Open Market Committee (FOMC) lowered its benchmark overnight borrowing rate by 25 basis pointsto a target range of 4.5-4.75 per cent.

HSBC forecast the European Central Bank (ECB) to cut rates by 25 bps at every meeting from October until April 2025.Deutsche Bank anticipates a faster ECB rate-cutting cycle, with back-to-back quarter-point rate cuts starting from December.

“While economic growth is broadly stable, its outlook remains subject to downside risks such asthe dampening effect of monetary tightening on economic activity, geopolitical tensions, andpossible resurgence of protectionist policies. In addition, while the forecast for global commodityprices, notably energy, has mostly moderated, upside risks to inflation remain, as commodityprices continue to be susceptible to supply shocks such as global trade disruptions and adverseweather conditions,” it said.

Outlook

The MPC is scheduled to meet on December 26. The MPC may start monetary easing in 2025 Q1 by slashing interest rates by 200 basis points.

The MPC said it would continue to follow a data-driven approach to determine the durationof policy restrictiveness based on its assessment of the inflation outlook, underlyinginflation dynamics, and monetary policy transmission strength.