HC Securities & Investment anticipates that the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will leave interest rates unchanged at its upcoming 20 February 2025 meeting.
The firm expects delayed rate cuts due to pressures on Egypt’s foreign currency inflows, considering its external debt obligations and energy import costs.
Economic Pressures Impacting Policy Decisions
Heba Monir, Financials Analyst and Economist at HC, commented on Egypt’s external position, noting a slight deterioration in several key indicators:
Balance of Payments (BOP): Egypt posted a USD 991m overall deficit in 1Q24/25, reversing from a USD 229m surplus in the previous quarter.
Banking Sector’s Foreign Currency Position: The sector’s net foreign asset (NFA) position declined by 12% month-on-month (m-o-m) to USD 5.23bn in December 2024, while banks (excluding CBE) saw their net foreign liability (NFL) position widen by 10% m-o-m for the fifth consecutive month, reaching USD 6.42bn.
External Debt: Egypt’s external debt rose 1.52% quarter-on-quarter (q-o-q) to USD 155bn in 1Q24/25.
Positive Indicators Provide Some Relief
Despite these pressures, Egypt has seen some signs of economic improvement:
Net International Reserves (NIR): Increased by USD 156m m-o-m in January 2025, reaching USD 47.3bn, with non-official reserves deposits rising by USD 222m to USD 10.17bn.
Credit Default Swaps (CDS): Egypt’s 1-year CDS dropped to 332 bps in January, down from 379 bps in December 2024.
Purchasing Managers’ Index (PMI): Surpassed the neutral mark, reaching 50.7 in January, signaling improved business conditions for Egypt’s non-petroleum sectors.
Inflation and Treasury Bill Yields Impacting the Outlook
Egypt’s inflation came in higher than expected in January 2025, surpassing HC’s forecast of 22.8% and Reuters’ consensus median of 23.0%. Meanwhile, Treasury bill (T-bill) yields have been rising, with the 3-month T-bill rate increasing by 59 bps year-to-date (y-t-d) to 27.5% in the latest auction.
Given these factors, HC expects the MPC to keep rates unchanged to sustain the attractiveness of the carry trade, especially amid:
Geopolitical tensions affecting Egypt’s external revenues (e.g., Suez Canal disruptions).
Uncertainties over U.S. policies regarding potential displacement of Gaza residents to neighboring countries, including Egypt.
MPC’s Previous Decision and Global Interest Rate Trends
At its 26 December 2024 meeting, the MPC left benchmark interest rates unchanged for the sixth consecutive time, keeping the overnight deposit rate at 27.25% and the lending rate at 28.25%.
This followed a 600 bps rate hike in March 2024, bringing total increases to 1,900 bps since Egypt started monetary tightening in 2022.
Globally
The U.S. Federal Reserve maintained the federal funds rate at 4.25%-4.50% on 29 January 2025, having raised it by 525 bps since 2022 before implementing 100 bps in cuts.
The European Central Bank (ECB) cut key interest rates by 25 bps on 30 January, bringing its total rate reductions to 125 bps since it began easing policy in June 2024, following a 450 bps rate hike since 2022.
Conclusion: Stability Over Aggressive Easing
HC believes that Egypt’s external vulnerabilities and rising geopolitical risks necessitate maintaining interest rates at current levels.
While some economic indicators show signs of improvement, pressures on foreign currency inflows, external debt, and inflation dynamics support the MPC’s decision to hold rates steady for the time being.
