The Central Bank of Egypt (CBE) has projected a continued decline in inflation over the next two years, with annual headline inflation expected to average 14.0% in 2025 and 10.5% in 2026, compared to 28.3% in 2024. The Bank anticipates inflation will gradually converge towards its target of 7% (±2%) on average by the fourth quarter of 2026, signalling steady progress toward price stability following two years of inflationary pressures.
In its Q3 2025 Monetary Policy Report, the CBE emphasised that while the disinflation trend remains broadly intact, it continues to face upside risks from both domestic and global fronts. These include a higher-than-expected passthrough from fiscal consolidation measures, global commodity price volatility, and potential geopolitical flare-ups that could disrupt trade and energy markets.
Monetary Policy Report: Anchoring Transparency and Expectations
The CBE’s latest report underscores its ongoing efforts to enhance monetary policy transparency and strengthen public confidence in its inflation-targeting framework. It presents a detailed analysis of global and domestic developments, shedding light on inflation dynamics, growth trends, and financial conditions shaping the Egyptian economy in the third quarter of 2025.
The report also provides an outlook section offering a forward-looking assessment of headline inflation and real economic activity. This analysis is supported by an evaluation of the prevailing balance of risks, ensuring a data-driven approach to policymaking and market guidance.
Additionally, the report includes three thematic boxes highlighting critical aspects of monetary policy conduct:
- The Basic Institutional Design of an Inflation Targeting Regime, exploring the structural underpinnings of Egypt’s transition toward a full-fledged framework.
- Headline vs. Core Inflation, analysing the interplay between the two indicators and their implications for policy calibration.
- Economic Activity and Employment: Does Okun’s Law Hold for Egypt?, which examines the empirical relationship between output and employment in the Egyptian context.
Economic Outlook: Growth Gathers Pace
Real GDP growth is expected to strengthen in the coming fiscal years, with projections of 4.8% in FY 2025/26 and 5.1% in FY 2026/27, according to the CBE. This acceleration will be driven primarily by robust performance in key sectors such as manufacturing, extractions, and services, alongside progress in monetary easing that is expected to bolster real private-sector credit growth.
The forecast also factors in a gradual recovery in Suez Canal revenues, underpinned by the expected normalisation of maritime activity in the Red Sea following the recent Gaza armistice. The CBE projects that the output gap will continue to narrow over the forecast horizon, with overall output levels approaching their potential by the end of FY 2025/26 — an indicator of a healthier, more balanced economy.
Global Developments: Moderating Inflation and Renewed Capital Flows
Globally, economic growth continued to recover in the second quarter of 2025 and is anticipated to maintain its momentum in the third quarter, albeit at a slower pace. This expansion is largely driven by emerging market economies, while developed markets exhibit moderate growth amid cautious monetary easing.
Global inflation has been moderating steadily, approaching central banks’ target ranges as commodity prices—particularly energy and food—have continued to ease. Energy prices stabilised, while international food prices declined for the fourth consecutive month through September 2025.
Improving inflation dynamics prompted central banks in both advanced and emerging economies to cautiously advance their monetary easing cycles, leading to more accommodative global financial conditions. This shift has resulted in a notable increase in capital inflows to emerging markets, including Egypt, where investor sentiment has been further reinforced by improving macroeconomic fundamentals and progress on structural reforms.
Egypt’s Sovereign Rating Upgraded by S&P
In a significant vote of confidence, S&P Global Ratings upgraded Egypt’s long-term sovereign credit rating from ‘B-’ to ‘B’ in October 2025, reflecting enhanced confidence in the country’s economic outlook. The upgrade was supported by the continued implementation of reform measures, stronger real growth, and improving external sector indicators, including rising reserves and healthier balance-of-payments dynamics.
The agency also noted Egypt’s commitment to fiscal discipline and the CBE’s effective inflation management, which together contribute to a more sustainable macroeconomic trajectory. The rating upgrade is expected to further reduce Egypt’s borrowing costs in international markets and enhance its attractiveness to portfolio and direct investors.
Domestic Developments: Inflation Eases and Growth Broadens
Domestically, the inflation outlook has shown clear signs of improvement. Annual headline inflation decelerated to an average of 12.5% in Q3 2025, compared to 15.2% in Q2, driven largely by a pronounced decline in food inflation, which has now reverted to pre-2022 levels.
Core inflation also moderated to 11.2%, down from 11.6% in the previous quarter, reflecting lower cost pressures and an easing in supply chain disruptions. Nonetheless, non-food inflation remained relatively persistent, fuelled by higher service costs—particularly rents—and moderate adjustments in administered prices.
The CBE’s nowcast for Q3 2025 signals a continued recovery in economic activity, with quarterly growth expected to hover around 5%. Key growth drivers include non-petroleum manufacturing, tourism, and the Suez Canal, which have all shown robust post-crisis recoveries.
Real Sector Performance and Demand Dynamics
Egypt’s real GDP at market prices expanded by 5.0% in Q2 2025, marking the fastest growth since early 2022. This strong performance lifted FY 2024/25 growth to 4.4%, up sharply from 2.4% in the previous year.
The rebound was primarily fuelled by higher private consumption and gross domestic investment, particularly in construction, manufacturing, and technology-driven sectors. The CBE expects demand-side inflationary pressures to remain contained, supported by the prevailing monetary policy stance and the projected path of the output gap.
Labour Market Trends and Wage Developments
In the labour market, real wages recorded positive growth for the fourth consecutive quarter during Q2 2025. While this improvement reflects a gradual recovery in household purchasing power, wage levels remain below their 2022 averages, suggesting limited inflationary pressure from the wage channel. Employment growth was strongest in manufacturing, logistics, and tourism—sectors that have benefited most from renewed investment and demand recovery.
External Sector: Current Account Improves and Reserves Strengthen
The current account deficit narrowed by 41% year-on-year in Q2 2025, driven by sustained increases in workers’ remittances, tourism receipts, and transport revenues, particularly from the Suez Canal. However, this improvement was partly offset by a wider hydrocarbon trade deficit, due to higher natural gas imports to meet local consumption needs.
Meanwhile, the financial account surplus remained robust, underpinned by continued foreign direct investment (FDI) inflows sufficient to cover the current account deficit. Consequently, Egypt’s overall balance of payments registered only a marginal deficit of $0.2bn in Q2 2025—a marked improvement over previous quarters.
On the monetary front, M2 money supply growth continued to slow, averaging 22.6% in Q3 2025, compared to 24.2% in Q2, reflecting tighter liquidity management and declining inflation expectations.
Monetary and Financial Conditions
The CBE reported a substantial improvement in net foreign assets (NFAs) within the banking system, which increased by $3bn between June and August 2025 to reach $17.9bn. This gain was primarily driven by commercial banks’ improved foreign exchange positions, sustained remittance inflows, and renewed portfolio investments.
Private-sector credit also expanded strongly, with local currency loans growing by 14.5% in Q3 2025, up from 12.6% in the previous quarter. The expansion reflects stronger credit demand and improving business confidence, supported by the CBE’s gradual monetary easing cycle, which saw cumulative policy rate cuts of 625 basis points in 2025.
The Bank noted that approximately 97% of policy rate cuts were transmitted to the interbank market, where the overnight rate averaged 23.6% in Q3 2025, down from 27.5% in Q1, confirming effective policy transmission.
Financial Markets and Sovereign Yields
Egyptian Eurobond yields declined by an average of 66 basis points in Q3 2025, continuing their downward trajectory since the start of FY 2024/25. This reflects more accommodative global financial conditions, declining sovereign risk, and a more sustainable macroeconomic position.
Improved investor confidence, combined with the sovereign rating upgrade and stronger fundamentals, is expected to further ease external financing pressures and support capital inflows into Egypt’s debt and equity markets over the medium term.
Optimistic outlook
The CBE’s latest projections signal a cautiously optimistic outlook for Egypt’s economy. With inflation on a downward path, growth gaining momentum, and external accounts improving, macroeconomic stability appears to be gradually taking hold.
Nevertheless, the Bank emphasises that continued structural reforms, fiscal discipline, and geopolitical stability will be essential to sustain this progress and reinforce resilience against external shocks.
If current trends persist, 2026 could mark a turning point for Egypt—ushering in a new phase of stable growth, anchored inflation, and renewed investor confidence in the country’s long-term prospects.
