Morgan Stanley Anticipates Egypt Will Lower Rates in Q4 Amid Decline in Inflation

Morgan Stanley has shared insights on the forthcoming central bank policy decisions in Egypt, noting a significant reduction in inflation for the fifth month in a row in July, which decreased to 25.7% year-on-year from 27.5% in June.

This decline was lower than Morgan Stanley’s prediction of 26.7% and the consensus estimate of 26.6% from Reuters. Nevertheless, the firm believes the Central Bank of Egypt (CBE) will keep interest rates steady in the short term due to several considerations.

First, even though inflation is subsiding more swiftly than anticipated, it continues to exceed the CBE’s target range of 7-9% for the fourth quarter of 2024. Prime Minister Madbouly has set a target to lower inflation to below 10% by early 2026.

Second, the recent hikes in government-regulated energy prices introduce additional uncertainty into the short-term inflation outlook. Fuel prices rose by about 15% at the end of July, while electricity prices surged by roughly 35% for consumers and 77% for industry at the end of August.

Moreover, under the flexible exchange rate system, a vital part of the International Monetary Fund (IMF) program, maintaining a tight monetary policy is critical to attracting foreign investment in local currency assets and managing speculative demand for foreign currency among residents.

In light of the lower-than-expected inflation figures for July and the recent slowdown in inflation trends, Morgan Stanley has adjusted its inflation forecast for December 2024 to 23%, down from the previous estimate of 26%. The forecast for December 2025 remains around 13%, considering the government’s plans to phase out expensive subsidies as part of fiscal reforms.

The Egyptian government has committed to bringing fuel prices to cost recovery levels by the end of 2025, aligning with the IMF’s third review of the $8 billion Extended Fund Facility (EFF). This commitment is seen as more flexible than the earlier quarterly fuel price indexing but indicates that energy costs will continue to affect inflation in the coming year.

Morgan Stanley now anticipates a cumulative 200 basis points in interest rate cuts in the fourth quarter of 2024, moving this expectation from the first quarter of 2025. They predict a reduction to 25.25% by December 2024, followed by further cuts totaling 600 basis points to 19.25% by June 2025, as significant base effects are expected to greatly decrease inflation in the first quarter of 2025, particularly in February.