CBE likely to ease monetary policy in 2025

As expected, Egypt’s central bank has kept overnight interest rates unchanged due to easing inflationary pressures. The Central Bank of Egypt’s Monetary Policy Committee (MPC) left deposit rate, overnight lending rate, and the rate of the main operation unchanged at 27.25 per cent, 28.25 per cent, and 27.75 per cent, respectively.

The core and headline inflation rates have taken a downtrend since they peaked to 38 per cent in September 2023 and 41 per cent in June 2023, respectively, according to CBE data.

“While inflation has declined worldwide, key central banks have maintained a tight monetary policy stance to ensure that inflation converges to its target level. For international commodity prices, particularly energy, the outlook remains uncertain surrounding demand and supply over the medium term, especially that supply continues to be vulnerable to supply shocks stemming from geopolitical tensions,” the MPC said in a statement.

The MPC has started a gradual easing of monetary policy on February 15, in the wake of declining inflation rates. The monetary policy should strike a balance between investment needs and inflationary pressures, to maintain a stabilised growth rate.

Rate outlook

The CBE forecast a decline in inflation is anticipated in by the second half (H2) in 2025 thanks to combined impact of recent monetary policy tightening, unification of the foreign exchange market, and favorable base effects.

BMI Research forecast the CBE would hold overnight deposit and lending rates at 27.25 and 28.25 per cent, respectively, until end-2024, citing weaker FX risks and slowing inflation.

“We think that the CBE will start its monetary policy easing cycle in 2025 as inflation will trend further down, from 29 per cent in 2024 to 11.8 per cent in 2025, ending the year around the CBE’s upper inflation target range of nine per cent,” BMI research said in a report, a copy of which was obtained by The Egyptian Gazette.

The BMI Research report said the inflation slowed “even more sharply” than expected in March and April.

“We have revised our end-year forecast down from 30 per cent to around 24 per cent. This may be surprising, given the large depreciation of the currency,” it said.
BMI Research expects the CBE will cut overnight interest rates by 12 per cent in 2025.

However, the MPC statement hasn’t ruled out “upside risks” to the for ecasted disinflation path, include but are not limited to, an escalation of the current geopolitical tensions, unfavorable climate conditions, both domestically and globally, and a higher than anticipated out turns of fiscal prudence measures.

Rate cuts will be likely in the third quarter (Q3) this year Moreover, the policymakers may cut overnight interest rates by up to five per cent in 2025 to revive the nation’s credit market, on the one hand, and decrease the cost of the state’s internal debt servicing.

Lower overnight interest rates ultimately ease pressures on the public finances as yields on the state’s domestic debt instruments decline.

In the same vein, lower rates will also ease pressures on the local banks to offer competitive credit to the private sector. Decreased overnight rates slash the cost of money, as banks will pay lower yields on deposits.