Interest rate cuts on the horizon? - Economy - Al-Ahram Weekly

Al-Ahram Weekly

21-05-2025

Experts have been speculating about whether the Central Bank of Egypt's Monetary Policy Committee will cut interest rates at its meeting this week
Inflation in Egypt is forecast to average around 14 to 15 per cent and 10 to 12.5 per cent in the calendar years 2025 and 2026, respectively, compared to 28.3 per cent in 2024, according to the Central Bank of Egypt's (CBE) quarterly Monetary Policy Report.
The report, relaunched on Monday after a couple of years of hiatus, is part of the CBE's efforts to implement an inflation-targeting framework and enhance its policy transparency. It serves as the primary tool for explaining the rationale behind monetary policy decisions.
According to the report, headline inflation is expected to continue declining throughout the remainder of 2025 and 2026, albeit at a slower pace compared to the significant decline witnessed in the first quarter of 2025.
'The slower disinflation path is partially due to the drag from implemented and planned fiscal consolidation measures across the forecast horizon, in addition to the relative persistence of non-food inflation,' the report said.
All things being equal, inflation is expected to converge towards the CBE's target band of five to nine per cent on average in the fourth quarter of 2026, it added.
The report was published at a time when experts are speculating about what the Monetary Policy Committee (MPC) will decide regarding interest rates at its meeting on 22 May. The MPC had cut the overnight deposit rate, overnight lending rate, and the rate of main operations by 225 basis points (bsp) (2.25 per cent) to 25 per cent, 26 per cent, and 25.5 per cent, respectively, at its last meeting on 17 April.
'We expect the MPC to cut interest rates by 200 basis points (two per cent)… mainly to stimulate economic growth, given the relative stability in the domestic and international economic conditions compared to the previous month,' financial analyst and economist at HC Securities Heba Monir wrote in a note on Monday.
'The Egyptian economy was able to contain the inflationary pressures… our carry trade is still attractive, and there is a noticeable improvement in the Net Foreign Assets [NFA] position of the banking sector, facilitating foreign exchange liquidity and availability,' Monir wrote.
On a similar note, Aya Zoheir, head of research at Zilla Capital, was quoted as saying that the MPC is likely to cut interest rates by 100 basis points (one per cent).
She said that there are clear signals from the US Federal Reserve towards starting to lower interest rates in the near future, and major central banks like the European Central Bank and the Bank of England have already taken steps in this direction, which eases pressures on emerging markets.
According to Zoheir, high interest rates have become a burden on growth, and they also contribute to creating inflationary pressures. Referring to the MPC's decision to cut interest rates by 225 basis points on 17 April, she said it was unusual for an easing cycle to begin and then stop without clear justification, which could confuse the markets and raise questions about the consistency of the monetary policy direction.
Before cutting rates on 17 April, the MPC had hiked rates by a total of 1,900 bps (19 per cent) since it started its tightening policy in 2022.
An analyst interviewed by Al-Ahram Weekly did not believe a rate cut is in order, however. He said that on a monthly basis, aside from the drop in food inflation, everything else had increased in price.
In his calculation, after discounting items such as education and cigarettes, which do not experience regular hikes, the monthly inflation rate in April was the highest since February 2024 at 3.5 per cent.
He believes that with an unfavourable base effect, since May last year saw cooler inflation, the annual rate is likely to accelerate. He is expecting a pause by the MPC and a resumption of monetary easing at its July meeting.
On an annual basis, urban headline CPI (consumer price) inflation recorded 13.9 per cent in April 2025 compared with 13.6 per cent in March 2025.
Jihad Azour, director of the Middle East and Central Asia Department at the International Monetary Fund (IMF), said in an interview in late April that any further reductions in interest rates should be approached with caution.
It was important to be vigilant in managing monetary policy in the light of the current shocks, Azour said, adding that the IMF sees risks of a return of inflation and therefore advises that it is necessary to maintain a policy that leads to reducing inflation to stable single-digit levels.
What is important, the analyst who spoke to the Weekly said, was that the easing cycle has begun. The fact that there are differences about when it will happen should not be an issue, he added. He sees the MPC cutting 900 basis points (nine per cent) off interest rates before the end of the year and between 500 and 600 basis points (five to six per cent) next year.
The MPC meeting coincides with a visit by an IMF mission for the fifth review of Egypt's $8 billion Extended Fund Facility (EFF) loan agreement. Nigel Clarke, IMF deputy managing director, was also in town for a two-day visit.
Clarke met with Prime Minister Mustafa Madbouli, the governor of the CBE, and the finance minister and participated in the inaugural IMF Middle Eastern and North Africa (MENA) Research Conference at the American University of Cairo to discuss policy priorities for the region.
He also took part in a forum organised by the Lynx Strategic Business Advisors Forum, where he met with senior business executives.
According to the analyst, the IMF mission is likely to focus on three main issues during the fifth review: boosting private-sector participation in the economy; mobilising revenues from sources such as the Value Added Tax (VAT); and progress on the sale of stakes in state-owned enterprises.
In a statement following the IMF board of director's completion of Egypt's earlier fourth review, the IMF pointed to the need to take 'decisive measures to re-start divestment efforts, firmly reduce the state's footprint, and level the playing field.'
It also highlighted the importance of 'broadening the tax base, streamlining tax incentives, and enhancing compliance' to create the fiscal space for priority development and social needs.
Ahmed Kouchouk, Egypt's minister of finance, confirmed during his meeting with Clarke the government's 'commitment to continue adopting polices and reforms that enhance the role of the private sector along with the competitiveness of our economy, that build trust and partnership with our taxpayers in our sincere efforts to widen the tax base, that reduce the non-tax burden on investors, that bring down the debt-to-GDP ratio along with debt-service bill, and that create adequate space for additional targeted social and human capital spending.'
He noted that Egypt's GDP growth reached 3.9 per cent during the first half of the year, driven by strong private-sector activities. He also said that tax revenues were growing by 38.4 per cent, the highest rate recorded in decades.
He reiterated his commitment to cutting public debt, saying that 'we expect our budget sector debt to continue to decline as a percentage of GDP to reach 85 per cent by June 2025, down from 96 per cent in June 2023.'
* A version of this article appears in print in the 22 May, 2025 edition of Al-Ahram Weekly
Follow us on:
Facebook
Instagram
Whatsapp
Short link: