Morgan Stanley: CBE to begin interest rate cuts in Q1 2025

CAIRO – 18 November 2024: Morgan Stanley has forecast that the Central Bank of Egypt (CBE) will keep its benchmark interest rates steady in the upcoming meeting, maintaining the deposit rate at 27.25 percent and the lending rate at 28.25 percent. The investment bank expects the CBE to begin cutting interest rates in the first quarter of 2025, though this will depend on the evolution of inflation and other economic factors.

 

In a recent research note, Morgan Stanley pointed to the ongoing high inflation rate as a key reason for the CBE's cautious stance. The bank highlighted factors such as recent fuel price hikes and the depreciation of the Egyptian pound, which have put upward pressure on inflation. Although Egypt's annual inflation rate dropped to 26.5 percent in October, Morgan Stanley anticipates a gradual decline to 25.3 percent in November and 23.7 percent in December, though it acknowledged potential risks to this forecast.

 

The investment bank expects the CBE to begin easing interest rates in early 2025 as the impact of past price increases starts to dissipate. They project a gradual reduction in the policy rate throughout the year, potentially reaching 17.25 percent by December 2025, down from the current 27.25 percent. Inflation, meanwhile, is expected to stabilize at around 14 percent in 2025.

 

Morgan Stanley also noted that global economic uncertainties and geopolitical risks would likely lead the CBE to take a cautious approach. As a result, the bank does not foresee a rate cut in the coming months, with the first reduction likely occurring in February 2025. The bank expects inflation to drop to around 15 percent in early 2025, with month-on-month inflation returning to levels seen before 2022.

 

While keeping interest rates high until early 2025 would result in a significant positive real interest rate, Morgan Stanley analysts believe the CBE may prefer a gradual reduction in real interest rates. This strategy would help mitigate inflationary and foreign exchange risks, while supporting the transition to an inflation-targeting framework and more flexible foreign exchange policies in the face of global and geopolitical uncertainties.