(Bloomberg) -- Egypt looks poised to leave interest rates at an all-time high, awaiting signs that a recent wave of subsidy cuts won’t upset a five-month streak of slowing inflation.
The resultant hikes in fuel and electricity prices appear to be the main wildcard for the North African nation’s central bank to consider on Thursday, as the economy revives after a global bailout earlier this year. A steep currency devaluation around then appears to have had only a small inflationary impact and expectations are building among Egyptians for the first rate cut since 2020.
The regulator “won’t rush for now, given the need to entrench disinflation trends,” Jean-Michel Saliba of Bank of America Corp. said before the monetary policy decision.
Year-on-year inflation was 25.7% in July, having cooled from a record 38% in September 2023.
Saliba’s among six economists in a Bloomberg survey predicting authorities will leave the benchmark deposit rate at 27.25% for a third consecutive meeting. Three others — including Farouk Soussa at Goldman Sachs Group Inc. — are sure the worst is over for inflation and expect a 100-basis-point cut.
Such a reduction is probably just a matter of time after the Middle East’s most populous nation hiked the key rate a combined 8 percentage points early this year. Those moves culminated in the United Arab Emirates, International Monetary Fund and others pledging $57 billion in loans and investments, helping turn the Egyptian economy around after two years of turmoil caused in large part by shortages of foreign exchange.
A new cabinet appointed by President Abdel-Fattah El-Sisi in July is pushing ahead with the government’s long-promised plans to rein in spending. It followed up June’s 300% hike in subsidized bread prices by raising a range of fuel products as much as 15% and increasing electricity tariffs.
“The central bank will likely monitor possible second-round effects from the recent fuel—price hike before taking action on policy rates,” said Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes.
An early-August dip in the value of Egypt’s pound, which was hit by a wider emerging market selloff of carry-trade currencies, may also encourage caution, he said. At the time, Egyptian authorities estimated foreign-capital outflows amounting to 7% to 8% of total holdings. It’s unclear if some of those flows have come back.
One broader consideration comes from a possible US Federal Reserve rate cut later this month. Such a move would probably make it easier for Egypt to ease monetary policy and remain attractive to foreign portfolio investors. It’s unclear if authorities in Cairo will want to pre-empt the US decision on Sept. 18. Egypt’s monetary policy committee is scheduled to meet again on Oct. 17.
“Global and domestic conditions have turned conducive enough for the central bank to embark on a gradual easing cycle,” said Carla Slim, an economist at Standard Chartered Plc.
A 100-basis-point cut and continuing disinflation would “allow the real policy rate to rise further to round 3.5% by end-September,” she said. That’s “restrictive enough to ensure coordinated tight fiscal and monetary policy” and support the IMF’s inflation-targeting priority.
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