Egypt’s central bank has kept its benchmark interest rates unchanged, extending a monetary policy pause as policymakers balance stubborn inflation pressures against improving monthly price trends and stronger economic activity.The Monetary Policy Committee left the overnight deposit rate at 19%, the overnight lending rate at 20% and the main operation rate at 19.5% at its meeting on Thursday, August 20. The discount rate was also maintained at 19.5%. The decision marked the fourth consecutive meeting without a change in borrowing costs following a 100-basis-point reduction in February.
Policymakers are maintaining restrictive monetary conditions after annual urban inflation accelerated to 14.9% in July from 14.3% in June. Core inflation, which excludes some volatile items and is calculated by the Central Bank of Egypt, climbed to 14.7% from 14.3%. Monthly urban headline and core inflation were both flat in July, indicating that underlying price momentum remained markedly softer than the annual figures suggested.
The divergence between annual and monthly inflation has complicated the case for further interest-rate cuts. Base effects are expected to push annual inflation higher during the third quarter, while subdued month-on-month readings point to a gradual easing of broader price pressures. Policymakers have indicated that inflation should begin moving lower after the third quarter and return to single-digit territory during the second half of 2027.
The central bank’s inflation target remains 7%, with a tolerance band of two percentage points, on average during the fourth quarter of 2026. That objective has become harder to achieve after higher energy costs, fiscal adjustments, exchange-rate pressures and regional instability altered the inflation outlook earlier this year. The bank has acknowledged that headline inflation could remain above the target range before moving closer to the objective during 2027.
Thursday’s decision continues a significant shift from the aggressive tightening cycle deployed during the currency and inflation crisis. The overnight deposit rate had reached a peak of 27.25% before a sequence of reductions during 2025 and early 2026 brought it down to 19%. The February move lowered policy rates by 100 basis points and was accompanied by a reduction in commercial banks’ required reserve ratio from 18% to 16%.
The prolonged pause reflects concerns that cutting borrowing costs too quickly could weaken the positive real interest-rate margin and revive inflation expectations. With the deposit rate still more than four percentage points above July’s annual urban inflation rate, monetary conditions remain restrictive, giving policymakers room to wait for clearer evidence that inflation is returning to a sustained downward path.
Economic conditions provide the central bank with greater flexibility to maintain that stance. Egypt’s economy expanded by about 5.2% during the first nine months of the 2025-26 financial year, reflecting stronger activity after the disruption experienced during earlier phases of the regional conflict and foreign-exchange shortage. Tourism, manufacturing, telecommunications and other services have supported the recovery, although private-sector demand continues to face pressure from elevated borrowing costs and consumer prices.
The country’s external buffers have also strengthened. Net international reserves rose to about $56.29 billion at the end of July from $55.07 billion a month earlier, giving monetary authorities additional protection against external shocks and currency-market volatility.
The improved reserve position follows substantial foreign investment inflows, multilateral financing and a more flexible exchange-rate regime. Remittance flows have also strengthened, adding foreign currency to the banking system and helping ease shortages that previously distorted trade and investment.
Risks remain concentrated around energy prices and geopolitical developments. Egypt is particularly exposed to higher oil and natural-gas costs, while disruptions to maritime trade and the Suez Canal can reduce foreign-currency earnings. Higher freight, insurance and imported commodity costs could also feed back into domestic inflation, potentially delaying monetary easing.
Topics
MENA