Egypt Keeps Rate at Record High as Subsidy Cuts Spur Caution

(Bloomberg) -- Egypt kept interest rates at a record high for another meeting as it weighs the effects of a new round of subsidy cuts on inflation that’s been slowing for five straight months.

The central bank maintained the deposit rate at 27.25% and the lending rate at 28.25%, its Monetary Policy Committee said Thursday in a statement. The decision was correctly predicted by six of nine economists surveyed by Bloomberg. The others, including Goldman Sachs Group Inc, expected a cut of 100 basis points. 

Authorities hiked the key rate a combined 8 percentage points early this year, but caution is reigning after they made a wave of steep price hikes for fuel products, electricity and subsidized bread over the summer.

The bank’s committee sees that “current policy rates remain appropriate to maintain the prevailing tight monetary stance until a significant and sustained decline in inflation is realized,” it said in its statement. Inflation is forecast “to hover around current levels until Q4 2024 given the implemented and projected fiscal consolidation measures.”

Year-on-year inflation in the Middle East’s most populous country was 25.7% in July, having cooled from a record 38% in September 2023. 

The figures have been defying many economists’ predictions by maintaining a slowdown even after Egypt in March let its pound plunge nearly 40% a bid to stem a two-year crisis. The move helped seal a global bailout led by the International Monetary Fund and United Arab Emirates totaling some $57 billion. 

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.

The central bank also may have been taking into account a limited early-August decline in the pound against the dollar driven by a wider investor selloff in emerging markets. Egyptian authorities estimated foreign-capital outflows amounting to 7% to 8% of total holdings. It’s unclear if some of those have returned.

“Monitoring the pound’s weakness, albeit relatively small, on inflation expectations is warranted,” Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes, said before the decision.

Another consideration comes from a possible US Federal Reserve rate cut later in September. Such a move would probably make it easier for Egypt to ease monetary policy while maintaining an inflation-adjusted interest rate that’s attractive to foreign portfolio investors.

--With assistance from Sherif Tarek.

(Updates with committee’s comments in fourth paragraph.)

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