CBE extends inflation target horizon to Q4 2026 at 7% (± 2%), Q4 2028 at 5% (± 2%)

The Central Bank of Egypt (CBE) has decided to extend its inflation target horizon, setting an average target of 7% (± 2%) for the fourth quarter (Q4) of 2026, and 5% (± 2%) for the fourth quarter of 2028. This adjustment aligns with the CBE’s gradual transition towards an integrated inflation-targeting framework.

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Accompanying this decision, the Monetary Policy Committee (MPC) on Thursday opted to keep the CBE’s key interest rates unchanged for the sixth consecutive time. As a result, the overnight deposit rate remains at 27.25%, the lending rate at 28.25%, and the main operation rate along with the credit and discount rate are set at 27.75%.

The MPC explained that, globally, central banks in both advanced and emerging economies have continued to reduce interest rates gradually as inflation rates decrease. However, these banks have maintained tight monetary policies as actual inflation still exceeds their target levels.

The Committee noted that the global economic growth rate remains stable, though it continues to fall short of pre-COVID-19 levels. While growth expectations remain relatively unchanged, they are subject to risks such as the adverse effects of monetary tightening, geopolitical tensions, and potential trade protectionism.

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Global commodity prices have experienced slight fluctuations recently. While there are expectations of a potential drop in prices, especially for energy products, risks to the inflation path remain, including disruptions in global trade and adverse weather conditions affecting agricultural production.

Domestically, preliminary data for Q3 and Q4 of 2024 indicate continued economic recovery, with real GDP growth accelerating compared to Q2 of 2024. However, GDP remains below its potential, suggesting that inflation is likely to decline in 2025, reaching its full capacity by the end of fiscal year 2025/2026.

Regarding wages, inflationary pressures remain limited due to weak real wage growth. Although annual headline inflation stabilized in the past three months, it declined to 25.5% in November 2024, driven by a reduction in food prices. The prices of basic food items and fresh vegetables saw their lowest annual inflation rate in nearly two years, at 24.6% in November 2024. In contrast, administratively controlled prices for non-food items, such as fuel, transport, and tobacco, rose in line with fiscal deficit-reduction strategies. As a result, the annual core inflation rate fell to 23.7% in November 2024, down from 24.4% in October 2024.

The MPC indicated that these developments, along with improving inflation expectations and the return of monthly inflation rates to their typical pattern, suggest a continued decline in inflation.

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The Committee explained that, after two years of sharp inflationary increases globally, inflation in both advanced and emerging economies has begun to decrease, although it remains above target rates. Similarly, Egypt’s headline inflation rate has recently started to decline. The MPC anticipates Egypt’s general inflation rate will average around 26% in Q4 of 2024, exceeding the CBE’s target rate of 7% (± 2%). This overshoot is attributed to various global and local factors from 2022 to 2024, including the rise in global food prices in 2021, imported inflation, capital outflows following the Russian-Ukrainian conflict, local supply shocks, and fiscal adjustment measures aimed at reducing the deficit. Consequently, inflation peaked at 38% in September 2023, before falling to 25.5% in November 2024.

Since March 2024, the CBE has implemented corrective measures to stabilize the macroeconomy, helping to contain inflationary pressures and reduce general inflation. These measures include restrictive monetary policies and the unification of the foreign exchange market, which helped solidify inflation expectations and attract additional foreign currency inflows.

However, risks remain, including the potential escalation of geopolitical tensions, the return of protectionist policies, and the growing impact of fiscal tightening measures. The MPC expects inflation to decline significantly from Q1 2025, with the cumulative effects of monetary tightening and the positive impact of base effects, bringing inflation closer to single digits by the second half of 2026.

The Committee believes that maintaining CBE’s key interest rates unchanged is prudent until a noticeable and sustainable reduction in inflation is achieved, thereby solidifying expectations and meeting the inflation target. The MPC emphasized that decisions regarding the duration and intensity of monetary tightening will be made on a meeting-by-meeting basis, dependent on emerging data and surrounding risks.

The MPC also assured that it will continue to closely monitor economic and financial developments, assessing their potential impact on key economic indicators, and will not hesitate to use all available tools to bring inflation in line with its target rates.