CBE's December meeting: Will rates remain unchanged amid inflation decline?

The Thursday meeting comes amid bold expectations that the MPC will maintain the current interest rates in response to the low-pace inflation downward path and the expectations that global inflation could pick up again due to the economic policy of the re-elected US President Donald Trump.

In 2024, the CBE hiked the key interest rates by eight percent (800 bps), bringing the total hikes applied since the start of the monetary policy tightening cycle in March 2022 to 19 percent (1,900 bps).

Accordingly, the overnight deposit rate, overnight lending rate, and primary operations rate now stand at 28.25 percent, 27.75 percent, and 27.75 percent, respectively.

HC Securities & Investments expected the CBE to keep the current interest rates unchanged despite recent inflation readings.

Egypt's annual headline inflation rate decreased to 25.5 percent (YoY) in November, down from 26.5 percent in October, according to the latest data from the Central Agency for Public Mobilization and Statistics (CAPMAS).

CAPMAS also indicated that, on a monthly basis, prices rose by 0.5 percent in November, a slight moderation compared to the 1.1 percent increase in October. This suggests a gradual easing in inflationary pressures.

Meanwhile, Egypt's annual core inflation rate kept its downturn trend for the third consecutive month, declining to 23.7 percent in November from the 24.4 percent it saw in October, according to the CBE calculations.

Monetary policy shifts have also been observed globally, according to financial analyst and economist at HC Heba Monir.

“On 18 December 2023, the US Federal Reserve reduced the federal funds rate by 25 bps to a range of 4.25 to 4.5 percent. This cut represents a total reduction of one percent (100 bps) following a cumulative increase of 5.5 percent (525 bps) since the beginning of its tightening policy in 2022,” Monir explained.

Additionally, the European Central Bank (ECB) lowered its key interest rates by 25 bps on 12 December 2023, bringing total cuts to one percent (100 bps) since the ECB started reducing rates in June 2024, according to Monir.

“Overall, these developments reflect a complex interplay of domestic and international economic factors impacting monetary policy and inflation trends,” she highlighted.

Under the fourth review of the IMF's $8 billion loan programme for Egypt, the CBE reiterated its commitment to maintaining a flexible exchange rate regime to shield the economy from external shocks.

The CBE also aims to sustain tight monetary conditions to further mitigate inflationary pressures. It is working towards modernizing its operations and gradually transitioning to a full-fledged inflation-targeting regime.

Strengthening financial sector resilience and improving governance and competition within the banking sector are also identified as key priorities for the future.

“Expectations strongly indicate that the CBE will maintain interest rates in its Thursday, 26 December meeting. This expectation is based on a range of local and global economic factors influencing this decision,” banking expert Hani Abul-Fotouh told Ahram Online.

Abul-Fotouh also cited the recent slowdown in inflation rates as one of the main factors supporting the forecast for maintaining the current interest rates.

“Although this slowdown is significant — being the first in four months after a period of acceleration due to rising fuel, transportation, and essential goods prices — it is not deemed sufficient to justify a rate cut. The central bank prefers to ensure the sustainability of this decline before taking any reduction measures,” the expert pointed out.

In October, Egypt’s Ministry of Petroleum and Mineral Resources significantly increased fuel prices, marking the third adjustment in 2024. Additionally, some telecom service providers in the country raised the monthly fees of both landlines and internet packages.

“Maintaining the attractiveness of foreign investments is a key priority for the CBE. High interest rates contribute to attracting foreign capital into government debt instruments such as treasury bills, which support foreign currency reserves. While global interest rate movements, particularly in the US, indirectly influence local decisions, Egyptian monetary policy primarily focuses on local macroeconomic indicators, especially inflation,” he added.

According to Abul-Fotouh, other factors supporting the expectation of maintaining the current interest rates include the government's continued implementation of the IMF-backed economic reform programme and increases in fuel and electricity prices, which may lead to short-term inflationary pressures.

Otherwise, cutting rates now could exacerbate these pressures and hinder the CBE’s plan to reduce inflation to targeted levels (five to nine percent), which remains distant despite the current slowdown.

Despite the inflation downturn in Egypt over the past few months, inflation rates are still well beyond the CBE's targets of seven percent (±2 percent) by the end of 2024 and five percent (±2 percent) in the fourth quarter of 2026.

“A rate cut stimulates spending and consumption, potentially increasing demand and subsequently raising prices. Additionally, a rate cut reduces the attractiveness of investing in Egyptian debt instruments, which could lead to capital outflows and pressure on the exchange rate,” Abul-Fotouh explained.

He added that maintaining the current interest rates gives the CBE ample room to monitor inflation developments and market stability.

“Expectations suggest that a gradual rate cut could begin in the first quarter of 2025 if inflation rates continue to decline sustainably, alongside the stabilization of the Egyptian pound (EGP) and improvement in other economic indicators," he continued.

"These expectations align with current forecasts of stable inflation rates in Egypt at their current levels until the end of 2024, with a significant decrease anticipated starting in the first quarter of 2025 due to the cumulative effect of monetary tightening decisions and the positive impact of the base period,” he added.

Moreover, the foreign exchange (FX) rate in Egypt has fluctuated over the past two weeks, currently standing at EGP 51.22/$1, up from EGP 49.6/$1.

Since March 2022, the FX rate in Egypt has significantly jumped by almost 225 percent, from EGP 15.6/$1 to over EGP 51/$1.

Goldman Sachs attributed this rise to T-bills profit-taking before the end of 2024, while HSBC expected the US dollar will depreciate by the beginning of 2025, projecting a robust rise regarding the investments in the short-term debt instruments (aka hot money).

However, Abul-Fotouh said inflation rates may temporarily increase due to external factors such as geopolitical tensions or rising global commodity prices or internal factors like ongoing financial reforms and significant fluctuations in the exchange rate, which affect the prices of imported goods.

“Maintaining the interest rate supports the stability of the Egyptian pound's exchange rate by attracting foreign investments in debt instruments due to high yields, increasing the flow of foreign currency,” he further explained.

According to the expert, it also curbs inflation by restraining aggregate demand, thereby enhancing the purchasing power of the pound and investor confidence. In addition, it encourages saving in EGP instead of foreign currencies, reducing demand for the dollar.

EFG Hermes Holding expected in a recent report that the CBE will introduce a five percent rate cut over 2025, while the National Bank of Kuwait projected a rate cut of eight to 10 percent in the same year.