Egypt’s Central Bank faces a challenging monetary policy decision on Thursday, 29 October, as renewed pressure on the Egyptian pound and mounting inflation risks complicate the outlook for interest rates. Economists remain divided over whether policymakers should maintain current borrowing costs or introduce another increase to contain price pressures and support currency stability.
The US dollar has climbed above EGP 56, raising concerns about imported inflation and the extent to which higher foreign-exchange costs could feed through to domestic prices.
Annual urban inflation eased to 13.9% in September, down from 14.5% in August. However, the acceleration in monthly core inflation to 0.8% from 0.3% has reinforced uncertainty over the Central Bank of Egypt’s (CBE) next policy move.
At its previous meeting on 24 September, the CBE’s Monetary Policy Committee kept the overnight deposit rate unchanged at 19%, the overnight lending rate at 20%, and both the main operation and discount rates at 19.5%.
Economists Divided Between Holding Rates and Further Tightening
Economist Tarek Helmy expects the CBE to leave interest rates unchanged, ruling out a cut amid renewed pressure on the pound and persistent inflationary risks.
He said recent exchange-rate movements, combined with geopolitical uncertainty, make it important to preserve the attractiveness of Egyptian pound-denominated government debt to investors and maintain confidence in the domestic market.
Helmy also warned that raising rates would increase the government’s debt-servicing costs, adding to fiscal pressures at a time when public finances remain sensitive to elevated borrowing costs.
Mohamed Abdel Aal, a board member of Egyptian Gulf Bank, similarly expects the central bank to maintain its current policy stance, citing a combination of higher global oil prices and renewed exchange-rate pressure.
Oil prices have exceeded $100 per barrel, compared with the $75 benchmark assumed in the state budget, while the dollar has traded above EGP 54 at banks.
Abdel Aal also highlighted the acceleration in monthly urban inflation, which rose to 1.3% in September from 0.1% in August. He argued that higher energy prices and import costs could intensify inflationary pressures in the coming months.
In his view, the CBE is likely to wait for clearer evidence of how these developments are affecting domestic prices before adjusting monetary policy.
Magdy Fahmy, former chairman of the Industrial Development Bank, takes a more hawkish position, forecasting a one-percentage-point interest rate increase on Thursday, potentially followed by another hike before the end of the year.
Fahmy said continued depreciation of the pound and rising import costs could accelerate inflation, particularly if international energy prices remain elevated.
Currency Pressures Complicate the Interest Rate Outlook
Exchange-rate stability remains a central concern for Egyptian policymakers, given the country’s reliance on imports and the risk that currency depreciation could translate into higher domestic prices.
Fahmy argued that higher interest rates could help attract foreign portfolio investment into Egyptian government debt instruments, supporting foreign-currency inflows and easing pressure on the exchange rate.
However, tighter monetary conditions would also raise financing costs for businesses and households, potentially weighing on private investment, economic expansion and mortgage lending.
Helmy, meanwhile, cautioned that persistently high interest rates are placing pressure on productive sectors and limiting their capacity to expand. He also called for greater transparency in the foreign-exchange market, arguing that uncertainty over the dollar’s trajectory can contribute to pricing distortions across some markets.
Banking expert Hany Aboul Fotouh also expects the CBE to keep rates unchanged at its upcoming meeting, although he acknowledged that further tightening could become necessary if exchange-rate pressures intensify and inflation accelerates.
He added that a rate cut would require more convincing evidence of sustained pound stability and a broader slowdown in monthly inflation.
The central bank therefore faces a delicate balancing act: containing inflation and supporting currency stability without imposing additional pressure on government finances, businesses and household borrowing.
IMF Programme Reinforces Shift Towards Inflation Targeting
Egypt’s monetary policy decisions are also shaped by its economic reform programme under the International Monetary Fund’s Extended Fund Facility (EFF), which is scheduled to conclude in mid-December.
Under the programme, the CBE has shifted away from an exchange-rate-anchored approach towards a more conventional inflation-targeting framework supported by a flexible, market-determined exchange rate.
The transition forms a central pillar of Egypt’s broader economic stabilisation strategy, which seeks to reduce parallel-market distortions, rebuild foreign-exchange liquidity buffers and gradually bring inflation expectations towards single-digit levels over the medium term.
A flexible exchange rate is intended to act as a shock absorber against external economic disruptions, allowing currency movements to reflect market conditions rather than requiring the central bank to defend a predetermined exchange-rate level.
Under this framework, foreign-exchange intervention is intended primarily to smooth excessive market volatility rather than maintain a specific currency valuation. The approach also aims to prevent the accumulation of import backlogs, preserve net international reserves and strengthen the domestic interbank foreign-exchange market, enabling commercial banks to manage legitimate demand for foreign currency more efficiently.
Nevertheless, the transition presents significant policy challenges. Domestic inflation remains vulnerable to exchange-rate pass-through, higher import prices and adjustments to administered prices, including fuel and utility tariffs. These pressures complicate the timing of monetary easing, even as economic activity shows signs of recovery.
At the same time, elevated interest rates increase the government’s debt-servicing burden, particularly on Treasury instruments, underscoring the importance of fiscal consolidation, sustained primary budget surpluses and longer debt maturities.
The CBE’s forthcoming decision will therefore carry implications beyond the immediate direction of borrowing costs. It will also signal how policymakers intend to balance inflation control, exchange-rate flexibility, investment conditions and fiscal sustainability as Egypt continues its economic stabilisation efforts.
