Central Bank of Egypt holds fire in July

Central Bank pauses loosening cycle: At its meeting on 10 July, the Monetary Policy Committee of the Central Bank of Egypt (CBE) decided to pause its loosening cycle and maintain the benchmark overnight deposit, overnight lending and the main operation rates unchanged at 24.00%, 25.00% and 24.50%, respectively. The hold followed total reductions of 325 basis points since April, when the current loosening cycle began, and surprised most market analysts, who had projected a third consecutive reduction.

Bank shifts to a wait-and-see approach: The CBE’s hold likely reflected its desire to take time to assess the impact of recently implemented economic reforms. The Bank noted that headline and core inflation fell further through June, leading inflation expectations to cool. Moreover, economic activity is expected by the Bank to have continued to recover in April–June, with GDP growth remaining robust and close to that of January–March; accordingly, the output gap is now expected to be negative despite narrowing, slightly dampening inflation.

Pause in loosening cycle likely to be extended: The CBE did not provide explicit forward guidance on interest rates. Most of our panelists expect the Bank to hold rates again when it reconvenes on 28 August, and then project the CBE to resume its loosening cycle in October–December. Our Consensus is for rates to fall by around 400 basis points by the end of December.

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