Egypt Keeps Rates High as Subsidy Cuts Prompt Inflation 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.

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.

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