Egypt central bank to begin cutting interest rates in September

As inflation continues to decline, the Central Bank of Egypt will likely begin its monetary easing cycle in September, with interest rate cuts of a cumulative 400 bps by year-end, stated the National Bank of Kuwait (NBK) in its latest economic brief.

Egypt’s economy has started to show early signs of recovery with inflation cooling. In addition, Egypt’s growth indicators are ticking up, the currency is stable, and external finances are correcting sharply, making the case for an interest rate cut this year.

Egypt’s economic outlook

The latest data reveals that economic growth is continuing its downward path, slowing for the fifth consecutive quarter to 2.2 percent in Q3 (January-March 2024)  from 2.3 percent in the previous quarter. NBK expects Q4 growth to reach around 2.5 percent with the full-year growth at 2.4 percent versus 3.5 percent the previous year.

Inflation to continue declining

Inflation in Egypt has continued its downward trend in the last quarter, averaging 29.4 percent in Q2, down from 34 percent in Q1 as the pound devaluation’s impact fades and smoother FX availability allows for a better supply of goods. Moreover, average monthly price rises have slowed sharply to 0.7 percent in Q2 from 4.7 percent in Q1.

The bank now expects Egypt’s inflation to average around 25 percent in the second half of 2024, down from 31 percent in the first half, further raising hopes for an interest rate cut. In addition, it sees a strong possibility that inflation will end the year below 24 percent.

In the next financial year, NBK forecasts inflation to average 19 percent, down from 34 percent during this year.

“We continue to wait for the CBE to amend the inflation target timeline to Q4 25 (from Q4 24); a target of around 10 percent would be met based on current dynamics, in our view,” added the report.

Egypt’s interest rates to decline in H2

Egypt’s central bank kept rates stable throughout Q2 at 27.75 percent on the discount rate, while average 1-year treasury bills have dropped by 2 percent since March to 26 percent. This implies that markets are looking at a 1 to 2 percent interest rate cut in the coming period.

As Egypt’s inflation has decelerated over the past months, real interest rates have turned positive for the first time since January 2022. Therefore, the bank expects the CBE to start cutting rates in September.