Egypt Set to Hold Rates as Trump’s Gaza Plan Stokes Uncertainty

Egypt will probably delay the start of its long-awaited monetary-easing cycle, as Donald Trump’s trade tariffs and controversial proposal to relocate Palestinians from Gaza stoke economic uncertainty.

With the North African nation also grappling with inflation that slowed less than expected, all but one of eight economists in a Bloomberg survey see the central bank holding its benchmark interest rate at record high of 27.25% for a seventh consecutive meeting on Thursday. The exception, Morgan Stanley & Co Intl Plc, forecasts a 200-basis-point cut.

The US president’s swathe of protectionist trade policies have already caused a surge in the dollar’s value, hitting Egyptian portfolio inflows and halting what had been a tentative recovery of the local pound, said Farouk Soussa, Goldman Sachs Group Inc.’s economist for the Middle East and North Africa. 

Trump’s unprecedented suggestion that some 2 million Palestinians in Gaza be moved to neighboring states as part of a US plan to rebuild the war-ravaged territory has only added to the angst. The plan has been firmly rejected by Egypt, the rest of the Arab world and many nations across the globe. Trump has intimated he might cut aid to Cairo to force compliance.

While any economic impact for Egypt would likely be minor given US assistance represents just 0.1% of gross domestic product, “the prospect of American pressure being brought to bear on Egypt has eroded investor sentiment,” Soussa said. Arab leaders are due to meet this week in Saudi Arabia to work on a counterproposal that would see Palestinians remain in Gaza for its reconstruction.

The drama has also stirred concern over the fate of a monthlong ceasefire in Gaza between Israel and Hamas. A collapse may lead to a resumption of Houthi attacks on Red Sea vessels, upsetting hopes of shipping returning in force to the Suez Canal this year. Egyptian revenue from one of the world’s major trade routes has dropped by at least 60% due to the war, with a $7 billion loss estimated for the current fiscal year.

All these developments are “favoring a wait-and-see approach,” for Egypt’s central bank, said Samira Kalla, economist for the Middle East and North Africa at Deutsche Bank AG. 

Authorities are also weighing the effects of still-high local inflation, which bucked economists’ expectations by slowing only slightly to 24% in January from 24.1%. 

Elevated consumer prices are a symptom of the grueling two-year economic crisis in which Egypt was embroiled until a $57 billion global bailout led by the United Arab Emirates and agreed in early 2024 offered a way out.

That financing includes an expanded $8 billion International Monetary Fund deal. The lender has completed its fourth review of the program, although the board is yet to approve the associated $1.2 billion loan disbursement.

In September, the central bank said interest rates would remain at current levels until there was a “a significant and sustained decline” in inflation. Despite January’s mild surprise, most economists still expect February to show a sharp drop, mainly due to a favorable comparison with the year before.

By the next policy meeting in April, the central bank may have the benefits of two consecutive months of inflation below 20% and the IMF loan tranche, “making conditions more conducive” to an easing cycle, said Carla Slim, an economist at Standard Chartered Plc.

Egypt hiked interest rates to a record when it devalued its pound by about 40% last March. Its last cut was at the height of the Covid pandemic in 2020.

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