Egypt set for another interest rate cut to ease inflation
Egypt is on the brink of implementing another interest rate cut, a move widely anticipated by economists as the North African nation continues to grapple with slowing inflation and a strengthening local currency.
The prospect of an easing by the US Federal Reserve next month is also providing additional impetus for the Central Bank of Egypt (CBE) to trim its benchmark deposit rate.
A Bloomberg report anticipates a rate reduction from the current 24% following the CBE’s upcoming meeting on Thursday. Predictions for the cut range between 100 and 200 basis points, signalling a strong consensus within financial circles.
This potential cut would mark a continuation of Egypt’s recent monetary policy adjustments. The CBE initiated its first rate reduction in five years in April, followed by another in May, collectively easing by a significant 325 basis points. A pause in July was implemented as a precautionary measure against potential inflationary pressures that could arise from amendments to value-added taxes.
However, these concerns appear to have subsided. The upcoming rate decision will be the first since Hassan Abdalla was reappointed as central bank Governor on August 18. Data released recently showed consumer-price growth slowing for the second consecutive month in July, reaching 13.9%.
This figure is less than half the record 38% inflation rate witnessed in September 2023, which marked a low point during Egypt’s recent economic crisis.
The potential for a US Federal Reserve rate cut in September is also seen as a highly supportive factor for Egypt to resume its monetary easing cycle, according to Abu Basha.
Egypt currently boasts one of the world’s highest inflation-adjusted interest rates. This attractive status, coupled with a 40% currency devaluation in March 2024, has made the nation’s local debt a popular choice among emerging-market investors seeking high yields. A rate cut by the US would further help Egypt maintain this competitive advantage, ensuring a continued flow of crucial portfolio investment that supports government finances.
While Egypt’s substantial interest rate differential provides ample room for significant cuts, Abu Basha suggests that the central bank may adopt a “relatively conservative” approach. This caution is likely to persist until authorities implement a fuel-price hike in October, a measure that forms part of the International Monetary Fund (IMF)-backed reforms. Abu Basha forecasts a 100 basis-point reduction this week.
Reducing interest rates is also crucial for Egypt, one of the Middle East’s most indebted countries. Lower rates would help trim interest payments, which currently consume a substantial portion of state revenue. Furthermore, such a move is expected to stimulate local investment, a vital component for the nation’s economic revival and sustainable growth.
