Egypt’s Surprise Inflation Climb May Push Back Rate Cuts to 2025

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(Bloomberg) — Egypt appears set to wait until next year to make its first interest rate cut since 2020, as it faces an unexpected acceleration in inflation and fears of a broader conflict in the Middle East.

With the sharp rise in energy costs leading to two small increases in the Consumer Price Index in as many months, institutions such as Goldman Sachs Group have revised their previous expectations that a reduction was imminent. All nine economists in the Bloomberg survey see the central bank leaving its benchmark deposit rate at an all-time high of 27.25% on Thursday.

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Egypt’s decision also takes into account the threat of an all-out war between Israel and Iran that could lead to higher energy prices and further disruption of regional trade already damaged by Yemeni militant attacks on shipping in the Red Sea. The North African country is emerging from a two-year economic crisis after securing a global bailout of about $57 billion and devaluing its currency by about 40% in March.

“Delaying interest rate cuts would bode well for currency stability,” said Carla Slim, economist at Standard Chartered Bank. “Egypt’s foreign exchange liquidity prospects remain ambiguous due to the breadth and depth of the regional conflict.”

The most populous country in the Middle East raised interest rates by 8 percentage points this year, with inflation slowing even after the currency fell. With the US Federal Reserve embarking on a monetary easing cycle that encourages other economies to follow suit, most analysts believe that Egypt’s first reduction since the height of the coronavirus pandemic is only a matter of time.

But recent cuts in government subsidies for items such as fuel and electricity have pushed inflation higher and make easing more likely now in the first quarter of 2025.

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Announcing its latest interest rate suspension in September, the Central Bank of Egypt said the level would remain appropriate “until a significant and sustained reduction in inflation is achieved.”

That may not be too far off.

The inflation rate rose to 26.4% in September from 25.7% in July, a “modest acceleration” given that it reflects two rises in fuel prices and increases in drug, tobacco and energy prices, according to Mohamed Abu Basha, head of research at the Cairo Investment Company. EFG Bank Hermes.

He said the recent acceleration “would not pose major risks to inflation expectations.”

Goldman Sachs and EFG Hermes expect inflation in Egypt to remain at approximately the same level until January, before the positive comparison rate with the previous year leads to a sharp decline in February.

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