Egypt holds policy rates

The Egyptian central bank held all of its key policy rates flat on May 23, even though inflation dropped last month.

The Central Bank of Egypt’s monetary policy committee (MPC) kept the overnight deposit rate at 27.25%, and also held all its supplemental rates. Official headline inflation fell to 32.5% in April, down from 33.3% in the previous month, while core inflation dropped to 31.8% from 33.7%. 

The central bank said that its forecasts indicates inflation had already peaked and was likely to come down over the rest of the year. It said it expected a significant decline in the first half of next year due to tighter policy, Egypt’s recent currency devaluation, and favourable base effects. 

The MPC had raised interest rates by 800 basis points at a special meeting on March 6.

The central bank said foreign direct investment and substantial improvements in external financing conditions would boost foreign reserves and help price stability.

The International Monetary Fund approved a $5 billion addition in March to the country’s $3 billion extended fund facility that it had agreed in December 2022. The second loan was conditional on Egypt abandoning its fixed foreign exchange regime. 

The country did so in early March, and the Egyptian pound has since lost more than 50% of its value. The currency is currently trading at 47 pounds to the US dollar.

Egypt was acutely short of foreign exchange under its fixed exchange rate regime. 

In addition to the IMF loan, an investment deal with Abu Dhabi Developmental Holding Company, worth $35 billion, has provided the country with some relief. The United Arab Emirates-based company is set to develop Ras el Hekma on the northwestern coast of Egypt.

The central bank flagged geopolitical tensions and climate concerns as potential upside risks.

It stressed that it “will not hesitate to utilise all tools at its disposal to ensure that the policy stance is set at sufficiently restrictive levels, allow for a sustained decline in underlying inflation and safeguard price stability over the medium term”.

Rating agency Fitch expects the Egyptian central bank to start cutting rates only in 2025, forecasting inflation will reach 11.8% next year.