CBE expects inflation to stabilise in 2025 before gradually declining in 2026
In its meeting last Thursday, the Monetary Policy Committee (MPC) decided to keep key interest rates unchanged: 24% for deposits, 25% for lending, and 24.5% for the credit and discount rate and the main operation rate. This follows two consecutive rate cuts earlier this year—2.25% in April and 1% in May.
The MPC explained that the decision reflects the latest economic developments and forecasts since its last meeting.
'Globally, growth prospects have weakened since the start of the year, largely due to continued uncertainty over global trade policies and the potential resurgence of geopolitical tensions,' the Committee noted. 'As a result, central banks in both advanced and emerging markets have maintained a cautious monetary stance amid inflation and growth uncertainties.'
The MPC highlighted that international commodity prices—particularly oil—remain highly volatile due to supply dynamics and weaker global demand forecasts. Meanwhile, prices of basic agricultural commodities have seen a slight decline, supported by seasonal factors. Nonetheless, risks to inflation persist, including geopolitical tensions, continued global trade disruptions, and climate-related shocks.
On the domestic front, the Committee pointed to early indicators showing a sustained economic recovery in the second quarter (Q2) of 2025. Real GDP growth is expected to remain close to Q1's annual rate of 4.8%, up significantly from 2.4% in Q2 2024.
Regarding the output gap, the MPC estimated it is gradually narrowing but remains slightly negative, with expectations that the economy will reach full productive capacity by the end of fiscal year 2025/2026. Accordingly, demand-driven inflationary pressures are expected to remain contained, supported by the current monetary stance.
Annual headline inflation declined to 15.3% in Q2 2025, down from 16.5% in Q1, continuing its downward trajectory.
'This decline reflects stable monthly inflation, the effect of earlier monetary tightening, and the waning impact of previous shocks,' the MPC stated. 'In particular, annual headline and core inflation fell in June 2025 to 14.9% and 11.4%, respectively, driven mainly by negative monthly inflation rates of –0.1% and –0.2%, supported by lower food prices and stable non-food inflation.'
Despite these positive trends, the CBE signalled it is prudent to wait before cutting rates further to assess the potential effects of recent legislative changes, including amendments to the Value Added Tax (VAT) law.
The MPC reiterated that it will continue to review its policy decisions on a meeting-by-meeting basis, based on updated inflation forecasts, evolving risks, and incoming economic data.
'We will not hesitate to use all available tools to bring inflation down to the target average of 7% (±2%) by the fourth quarter of 2026,' the Committee stressed.
The MPC added that recent favourable developments in headline and core inflation have helped improve inflation expectations. However, the outlook remains dependent on factors such as movements in non-food prices and fiscal adjustments, including changes to administratively set prices and their potential impact on the broader price level.
The Committee concluded by reaffirming the importance of patience in the monetary easing cycle to allow enough time to evaluate the effects of recent policy and legislative changes. It emphasised that maintaining current interest rates is appropriate to sustain the disinflation trend, and future decisions will remain data-driven and responsive to emerging economic conditions.
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