CBE to Cut Interest Rates By 2% in May; Inflation to Decrease to 20% By End of 2024: Goldman Sachs

The Central Bank of Egypt (CBE) is expected to cut the key interest rates in May by two percent (200 bps), based on its view of inflation decreasing to 20 percent by the end of 2024, the US-based investment bank Goldman Sachs said in a research note.

The CBE’s Monetary Policy Committee is scheduled to convene on 23 May to review the key interest rates for the third time in 2024.

It targets taming the inflation to seven percent (±2 percent) in the fourth quarter (4Q) of 2024.

In the last unscheduled meeting in March, the CBE hiked the key interest rates by six percent (600 bps), bringing the total increases applied since the start of 2024 to eight percent (800 bps).

The interest rates now stand at 27.25, 28.25, and 27.75 percent for the deposit rate, the overnight lending rate, and the rate of the main operation, respectively.

According to the research note, the government's total borrowing reached EGP 1.8 trillion during the 1Q of 2024, in addition to receiving EGP 240 billion from the treasury.

This is compared to financing needs the bank estimated at EGP 1.1 trillion and EGP 382 billion that the government repaid from the overdraft balance, leaving a surplus of EGP 530 billion.

The bank also stated that the government's financing needs in the 2Q of 2024 will decrease by half, to reach EGP 1.6 trillion, including EGP 450 billion for settling the overdraft with the CBE.

However, the government borrowed more than its needs by around EGP 530 billion in the 1Q of 2024 and received around EGP 340 billion as the second instalment of the Ras El-Hekma development deal, signed with the UAE in February for $35 billion in FDI, the research note added.

This leaves a remaining gap of EGP 724 billion, the note said.

According to Goldman Sachs calculations, government debt issuances averaged EGP 604 billion during the 1Q of 2024, while in March alone, it exceeded EGP 951 billion. This explains the size reduction of accepted bids the government has made to ease the pressure on its debt interest.

Egypt is engaged in an Extended Fund Facility (EFF) loan programme, totaling $8 billion over 46 months. The IMF approved the programme in December 2022.

This programme is designed to address the imbalances of the Egyptian macroeconomy and budget in response to the tensions in the Middle East.

Egypt’s real GDP growth is expected to average three percent in 2024, before rebounding to 4.4 percent in 2025.

However, inflation will remain high over the short term because of the local currency depreciation.

Later, it will average 25.5 percent in the upcoming FY2024/2025 and then decrease to 15.2 percent by the end of the same fiscal year, due to the tightening of monetary policy and the appreciation trend of local currency, according to the IMF estimations.

Egypt’s annual headline inflation rate accelerated in March to 33.9 percent, up from 12.1 percent in the same month of 2022, according to the latest readings published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Similarly, the annual core inflation rate jumped to 33.7 percent in March 2024, compared to 35.1 percent in February 2024, according to the latest CBE calculations.