At its 20 August meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates at 19.0% and 20.0%, respectively, for the fourth consecutive time after it cut rates by 100 bps in February, reversing a total of 825 bps since 2025 of a total 1,900 bps in rate hikes since the CBE started its tightening policy in 2022. Egypt’s annual headline inflation decelerated to 14.5% y-o-y in August from 14.9% y-o-y in July, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices inched up 0.1% m-o-m compared to no change m-o-m in July. On the global front, on 16 September, the U.S. Federal Reserve raised the target range for the federal funds rate by 25 bps to 3.75-4.00% with total net cuts of 150 bps since September 2024, after it hiked rates by 525 bps since it started tightening policy in 2022, and on 10 September the European Central Bank (ECB) raised the key ECB interest rates for the deposit facility, the main refinancing operations and the marginal lending facility by 25 bps to 2.50%, 2.65% and 2.90%, respectively, with total net cuts of 150 bps since it started cutting rates in June 2024 after it hiked rates by 450 bps since it started its tightening policy in 2022.
HC’s comment: The relatively stable outlook for Egypt’s external position may not sufficiently protect it from prospective challenges amid the recent escalation of regional geopolitical turbulence and its implications for energy prices. In this regard, we highlight Egypt’s key points of strength: (1) its 5-year CDs remain stable at 276 bps, down from their peak of 431 bps on 30 March 2026, (2) Egyptian banks’ net foreign assets (NFA) increased by a total USD7.09bn over four months from April to July, almost reversing the total drop of USD8.18bn during February and March 2026, standing at USD28.4bn as of July, (3) net International Reserves (NIR) increased by USD5.76bn y-t-d reaching USD57.2bn in August, enhanced by disbursements of USD3.80bn from the International Monetary Fund (IMF) and EUR2.50bn from the European Union (EU), additionally, deposits not included in official reserves increased by a total USD3.90bn over four months from May to August, recovering the total drop of USD2.90bn during the three months from February to April, reaching USD14.7bn in August, and (4) Egypt’s flexible exchange rate acted as a shock absorber during the regional conflict, with the EGP depreciated by c13% against the USD to EGP54.7/USD in the first week of April, it appreciated since then by c5% to EGP52.1/USD currently, minimizing its y-t-d depreciation to c9%. Domestically, the war prompted the government to reduce energy subsidies to achieve its fiscal consolidation targets, freeing up resources to support socially fragile and vulnerable income groups. Higher energy prices drove cumulative inflation to 9.89% y-t-d, after headline inflation accelerated to 14.5% y-o-y, and we anticipate inflationary pressures to persist in September and October. For the current month, we expect inflation to accelerate by 1.3% m-o-m, driven by higher housing, water, electricity, gas & other fuel costs, due to the annual increase in old rents coinciding with September and the seasonal impact of the start of the academic year at schools and universities. For October, we forecast a 2.1% m-o-m increase in headline inflation, reflecting our expectation of a c10% increase in diesel and gasoline prices. Regarding Egypt‘s carry trade competitiveness, the latest 364-day T-bills implied a positive real interest rate of 8.35% using our updated 12M inflation estimate of c13.3% (after deducting a 15% tax rate for European and U.S. investors), suggesting that Egypt’s carry trade remains attractive. Given our expectation that inflationary pressures will persist in 4Q26, driven by higher oil prices after Saudi Arabia closed its East-West crude oil pipeline, which further reduced global supply, and given developed economies’ central banks shifting to tighter monetary policies, we expect the MPC to hike interest rates by 100 bps.
