Egypt: MPC may begin easing cycle with 100-150bps rate cut on Feb 20

• Next MPC meeting: Feb 20, 2025
• Current policy rate: 27.75%
• EmergingMarketWatch forecast: 26.75-26.25%

The MPC will hold a regular rate-setting meeting on Feb 20 and we think the committee may finally launch the monetary easing cycle with a 100-150bps rate cut. Consumer inflation has been on a downward trend since it peaked at 37.9% y/y in September 2024, interrupted by fuel and electricity price hikes during 2024. The slowdown is expected to continue throughout 2025, supported by favourable base effects, tight policy stance, steady disinflation in the heavy-weight food category, and improvement in inflation expectations since the currency reform from March 2024. Further, market reports suggest foreign portfolio investors have returned to the debt market since the start of 2025, and regional tensions appear to be easing under a ceasefire agreement in Gaza. Should the ceasefire agreement hold and the hostilities in the Red Sea subside, the traffic through the Suez Canal - a key FX earner for Egypt - is expected to gradually recover. The FX rate has weakened slightly since November, which was attributed to seasonal increase in demand for hard currency, capital outflows, and payments for gas imports and arrears to international energy companies. However, the depreciation is relatively mild and the pound is likely to stabilize near current levels.

There are, however, risks to the disinflation path, such as regional tensions, higher than anticipated pass-through of fiscal measures, and global supply line disruptions due to higher tariffs. While energy commodity prices have mostly moderated, commodity prices continue to be susceptible to supply shocks such as global trade disruptions and adverse weather conditions. We believe the MPC will take these risks into account and will implement a cautious 100-150bps rate later this month. Further, education costs are expected to be raised in February, as Egypt had postponed the adjustment that was due in October, which may add a full percentage point to the headline inflation rate.

The MPC has delivered a massive 19pps interest rate increase and 400bps increase in the required reserve ratio since March 2022, but consumer inflation remains broad-based, reflecting FX pass-through, surging food prices, supply line disruptions, and robust monetary expansion. In the last meeting for 2024, the MPC also decided to extend the inflation target horizons to Q4 2026 and Q4 2028 at 7% (+/- 2.0pps) and 5% (+/- 2.0pps) on average, respectively, in line with CBE's gradual advance towards implementing a fully-fledged inflation targeting regime.