CBE to decide on interest rates amid strong market expectations of hold

Daily News Egypt

09-07-2025

The Central Bank of Egypt's Monetary Policy Committee (MPC) will hold its fourth scheduled meeting of the year on Thursday to determine the direction of interest rates, with strong market consensus pointing to a hold following two consecutive rate cuts earlier this year.
The CBE previously slashed key interest rates by a cumulative 3.25% — a 2.25% cut on 17 April and a further 1% on 22 May — bringing the current rates to 24% for overnight deposits, 25% for overnight lending, and 24.5% for both the credit and discount rate and the main operation rate.
In its May policy statement, the central bank cited a decline in inflationary risks, aided by easing trade tensions, improved exchange rate dynamics, and the normalisation of risk indicators, as justification for continuing its monetary easing cycle. The statement also highlighted that annual inflation fell sharply in Q1 2025, driven by waning inflationary pressures, tight monetary policy, a favourable base effect, and the dissipation of earlier shocks.
The CBE noted that core inflation has steadily declined since early 2025 and is now gradually aligning with the bank's medium-term target of 7% (±2%) on average by Q4 2026. It projected that headline inflation would continue its downward trajectory through the remainder of 2025 and into 2026. However, the pace of decline may be moderated by fiscal consolidation measures and relatively stable non-food inflation.
Still, the bank warned of persisting upside risks — including global protectionist trade trends, ongoing regional conflicts, and stronger-than-expected fiscal tightening.
The CBE reiterated its commitment to a data-driven, meeting-by-meeting approach, adding that it would continue monitoring economic and financial developments closely and would not hesitate to utilise all policy tools to achieve its inflation target.
In parallel, Egypt's annual urban inflation rate declined to 14.9% in June from 16.8% in May, according to figures released Wednesday by the Central Agency for Public Mobilisation and Statistics (CAPMAS). Month-on-month, consumer prices fell 0.1% in June, reversing a 1.9% rise in May. Nationwide inflation also eased to 14.4% from 16.5% in the same period.
A consensus of investment banks — including HC Securities & Investment, Al Ahly Pharos, CI Capital, Naeem Brokerage, Mubasher Trade, and Arabeya Online — expects the CBE to keep rates unchanged in tomorrow's meeting, citing geopolitical tensions and the likelihood of rising fuel and electricity prices as key factors that could reignite inflationary pressures.
Heba Monir, economist at HC Securities & Investment, stated: 'Egypt's external position showed resilience during the regional turbulence in June. The USD/EGP rate remained stable at EGP 49.6/USD by month-end, and the country's 1-year credit default swap (CDS) narrowed to 301 basis points, down from 333 at the start of the year.'
She added that foreign investors were net buyers in Egyptian treasury bonds, purchasing EGP 1.2bn worth in June despite some capital outflows linked to the Israel-Iran conflict. Interbank FX trading volume peaked at $800 million mid-June — significantly higher than the average $150m–250m — while worker remittances surged 39% year-on-year in April to $3bn, reaching $29.4bn in the first ten months of FY2024/25, reflecting stronger confidence in Egypt's FX liquidity.
Domestically, Egypt's Purchasing Managers' Index (PMI) rose to 49.5 in May, up from 48.5 in April, buoyed by renewed growth in the manufacturing sector. However, several sub-indices continued to signal underlying weakness in business conditions.
Looking ahead, Monir cautioned that inflation could rise again in July, citing Parliament's recent amendments to the Value Added Tax (VAT) Law, which are expected to raise cigarette prices by 16% and possibly electricity prices due to higher natural gas costs.
On the global front, she noted that US President Donald Trump's statement ruling out an extension of the 9 July deadline for trade deal negotiations could signal a return to higher tariffs, potentially fueling global inflation.
Despite these risks, Egypt's carry trade remains attractive. The latest 12-month T-bill auction yielded 24.833%, translating into a real return of 5.21% based on HC's 12-month inflation forecast of 16.03%, adjusted for the 15% withholding tax applied to foreign investors. Moreover, the average return demanded by foreign investors fell to 27.2% in June, down from 28% in May.
'Given the mix of domestic inflationary pressures, geopolitical uncertainty, and global trade risks, we expect the CBE to keep rates on hold in its 10 July meeting,' Monir concluded.