The Central Bank of Egypt, citing a decrease in inflation pressures but a softening of economic growth, kept its overnight interest rates on hold. A statement from the bank stated that the lending rate was still set at 28.25% and the deposit rate at 27.25%.
Rates have not changed for the third time since the African country’s apex bank signed an USD 8 billion financial support agreement with the International Monetary Fund (IMF) on March 6, when it hiked rates by 600 basis points (bps).
One analyst predicted a 100 basis point drop in rates, while the other fifteen analysts surveyed by Reuters recently predicted that rates would stay unchanged.
“With the gradual easing of previous shocks, inflationary pressures continued to subside, as annual headline and core inflation edged downward for the fifth consecutive month,” the central bank’s monetary policy committee (MPC) wrote in a statement accompanying the decision.
The conflict in Gaza, Russia’s invasion of Ukraine, and the coronavirus have all taken a toll on Egypt’s already fragile economy. For the first time since January 2022, the real interest rate increased as inflation fell to 25.7% in July 2024.
After reaching an all-time high of 38% in September, inflation started to decline gradually. In the coming days, August inflation data is expected.
“Domestically, real GDP growth softened to 2.2% in Q1 2024 compared to 2.3% in Q4 2023. The softening is driven by declining public contribution to economic activity due to the impact of Red Sea maritime trade disruption on the service sector,” the MPC said further.
According to the MPC, inflation would sharply drop in the first quarter of 2025 and economic growth would progressively rebound in the fiscal year that started on July 1.
“The gradual unwinding of food inflation along with the improvement of inflation expectations suggest that inflation is currently on a downward trajectory,” it said.
Talking about Egypt’s fight against inflation, the phenomenon is forecast to have declined for a sixth month in August 2024, helped by a favourable base effect. However, some analysts say it is likely to have increased month on month after a series of government-led price hikes.
One of the conditions of the financial support pact signed between Egypt and the IMF was to make the African nation increase domestic prices. The government as a result has raised the cost of many subsidised products to battle a budget deficit that hit 505 billion Egyptian pounds (USD 10.3 billion) in the fiscal year that ended on June 30.
According to the forecasts of 19 analysts, annual urban consumer inflation slowed to a median of 25.1% in August from 25.7% in July.
“We expect urban inflation to decelerate to 24.9% y-o-y for August on a favourable base effect. However, we anticipate a 1.0% m-o-m increase on the recent energy and transportation cost hikes at the beginning of August,” said Heba Mounir of HC Securities, while interacting with Reuters.
Naeem Holding, which forecast annual headline inflation of 24.8%, predicted an increase of 1.24% month on month from July. This was due to higher summer produce prices, fuel hikes of 10-15% near the end of July, a 25-33% jump in metro tickets at the beginning of August and a 21-31% increase in electricity tariffs.