Egypt: Central Bank stands pat in May
The Central Bank of Egypt (CBE) left all interest rates unchanged at its monetary policy meeting on 23 May, as had been expected by most market analysts. Therefore, the overnight deposit rate remains at 15.75%, the overnight lending rate at 16.75% and the main operation rate at 16.25%. This comes after the CBE cut all rates by one percentage point on 14 February to support the domestic economy on the back of slowing inflation and weakening global economic momentum.
The CBE likely felt it did not have room to cut rates again in May as inflation remained above the target range and government fuel subsidy cuts—due to come into effect in June—could stoke inflationary pressures in the short-term. Moreover, the CBE noted that volatile oil prices pose risks to the inflation outlook. On the other hand, the Egyptian pound has appreciated noticeably since January, which should limit future inflationary pressures. Overall, though, the CBE captured its meeting when saying the “key policy rates remain appropriate at this juncture”.
Looking ahead, the Central Bank of Egypt is likely to hold interest rates steady in the short-term to support economic activity without risking stoking inflation. The CBE is likely to adopt a wait-and-see approach to see how the economy performs, how inflation reacts to government subsidy cuts and how the pound evolves in the foreign exchange market before deciding on its next widely expected interest rate cut. In terms of the foreign exchange market, a must-watch factor will be how the monetary policy of the United States develops, as a more dovish Fed could result in more demand for the pound from abroad, supporting the Egyptian currency. The next monetary policy meeting is scheduled for 11 July.