CBE lowers inflation forecasts, keeps key rates unchanged

The Central Bank of Egypt (CBE) has lowered its inflation forecasts, expecting annual headline inflation to stabilise in the third quarter of this year before gradually declining towards its target of 7% (±2%) in the second half of 2027, following recent inflation developments that were more favourable than expected.

In a statement issued by the Monetary Policy Committee (MPC) last Thursday, the CBE said the downward revision to its inflation forecasts would reinforce current monetary conditions, which remain sufficiently restrictive and provide additional support for the expected downward trajectory of inflation.

Nevertheless, the balance of risks surrounding the inflation outlook remains tilted to the upside, reflecting renewed regional hostilities, the CBE said.

These risks could affect domestic inflation through a greater-than-expected pass-through from fiscal consolidation measures and increases in global food prices, particularly if global energy prices remain elevated for an extended period, it added.

The CBE’s MPC decided at its meeting last Thursday to keep its key policy rates unchanged, maintaining the overnight deposit rate at 19%, the overnight lending rate at 20%, and the main operation and discount rates at 19.5%.

This marks the fifth consecutive meeting at which the CBE has kept rates unchanged, following similar decisions on 20 August, 9 July, 21 May, and 2 April.

The CBE’s key policy rates are the main indicator of the near-term direction of interest rates on the Egyptian pound.

The MPC said the decision reflected its assessment of the latest inflation developments and outlook, as well as changes in the risks surrounding them.

Globally, economic activity slowed slightly, affected by geopolitical volatility and weaker demand, although it continued to be supported by sustained growth in trade and investment, the committee said.

Inflation rates remain generally elevated, despite varying degrees of inflationary pressure across economies, prompting central banks to maintain cautious monetary policies in line with prevailing economic conditions.

In commodity markets, energy and agricultural product prices increased as regional tensions escalated and concerns over supplies intensified, the MPC said.

It added that the global economic outlook remains uncertain and exposed to a range of risks, most notably persistent regional tensions, a further tightening of financial conditions, and renewed supply-chain disruptions.

Turning to domestic conditions, the MPC said real economic activity continued to grow at a moderate pace, with growth reaching 4.7% in the second quarter of 2026, compared with 5% in the first quarter, mainly reflecting the repercussions of regional tensions.

As a result, average real GDP growth reached 5.1% in FY2025/2026 and is expected to remain broadly stable at that level during FY2026/2027.

Nevertheless, output remains below its maximum capacity, although it is expected to gradually approach that level during the second half of 2027.

The projected output gap therefore indicates that demand-side inflationary pressures will remain limited in the near term, supported by an appropriately restrictive monetary policy stance, the MPC said.

Regarding inflation developments, the committee said annual headline inflation edged down to 14.5% in August 2026, driven by lower food inflation, which offset the impact of increases in electricity tariffs and rents.

At the same time, annual core inflation remained relatively stable at 14.9% in August 2026, reflecting broadly stable prices across core food items, consumer goods, and services.

According to the MPC, annual price developments indicate that inflation remains on a downward trajectory, supported by broad-based stability across the components of the consumer price index basket over the past three months.

Monthly headline inflation stood at -0.4%, 0%, and 0.1% in June, July, and August 2026, respectively.

Against this backdrop, the MPC decided to keep its key policy rates unchanged, noting that the current degree of monetary tightening provides sufficient room to contain the aforementioned risks while preserving the expected downward trajectory of inflation.

The committee said it would continue to assess monetary conditions in light of economic developments affecting the projected inflation path and the risks surrounding it, and would not hesitate to use the tools at its disposal to preserve price stability.

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