(Bloomberg) -- Egypt is poised to hold interest rates at an all-time high, seeking to keep a lid on inflation that’s slowing from a record despite a steep currency devaluation but may face pressure from another round of subsidy cuts.
With such caution reigning, all 10 economists in a Bloomberg survey expect the central bank to leave the benchmark deposit rate at 27.25% for a second straight meeting on Thursday. The first reduction since 2020 may come in the final quarter if the disinflationary trend continues and the US Federal Reserve makes a September cut.
“To build policy credibility, re-establish confidence in the currency and take inflation expectations lower, it’s critical that monetary policy stay tight,” said Simon Williams, economist for Central and Eastern Europe, the Middle East and Africa at HSBC Holdings Plc. “A cut now would be premature.”
The Middle East’s most populous nation is recalibrating after securing a bailout worth some $57 billion from the United Arab Emirates, International Monetary Fund and others that’s helping turn the economy around after two years of crisis. A new government appointed this month will likely be pushing ahead with IMF-backed reforms, which may include rises in fuel and electricity prices.
Global investors have piled into Egyptian debt since the currency plunged almost 40% on March 6, attracted by carry-trade returns in excess of 20%. That market may get another boost if Egypt’s inflation-adjusted interest rate finally turns positive later in the year. The figure is currently minus 0.25% after the central bank twinned Egypt’s fourth devaluation in about two years with a 600-basis point rate hike.
A slowing of Egyptian consumer prices in June for a fourth month gives reason for optimism. The index shrugged off the impact of a historic hike in the cost of subsidized bread to grow at its slowest pace since the start of 2023 — an annual 27.5% versus a record 38% last September.
That post-devaluation slowdown, which defied the predictions of many economists, showed how the Egyptian currency’s much lower value on the now-quelled local black market for US dollars had already been influencing the way retailers priced their goods.
Some headwinds for inflation may come from a potential gradual phasing-out of fuel subsidies and a possible rise in power tariffs later this year, although local investment bank EFG Hermes sees those as having a “relatively small effect.”
Egypt’s central bank said in May it expected a “significant decline” in inflation in the first half of 2025. The IMF also sees inflation slowing to 15.3% by the end of the fiscal year in June 2025.
The Washington-based lender’s expanded $8 billion program for Egypt puts an emphasis on maintaining tight policies. That may give the central bank another reason to delay any rate cut until after the IMF’s executive board discusses Egypt’s next program review, which was recently rescheduled to July 29.
--With assistance from Srinivasan Sivabalan.
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