The Central Bank of Egypt (CBE) has warned that the inflation trajectory and its target of 7% (±2%) for the fourth quarter (Q4) of 2026 are increasingly exposed to upside risks, citing the possibility of a prolonged regional conflict and stronger-than-expected impacts from fiscal consolidation measures.
The CBE’s Monetary Policy Committee (MPC) decided last Thursday to keep key policy rates unchanged at 19% for deposits, 20% for lending, and 19.5% for both the main operation and discount rates, following two consecutive rate cuts of 1% each in December 2025 and February 2026.
In its accompanying statement, the MPC said the decision reflects its evaluation of inflation developments and the outlook since its February meeting.
The move was widely anticipated by analysts and investment banks. It comes amid a recent uptick in inflation, record highs in the US dollar against the Egyptian pound in the official market, and heightened volatility in both local and global financial markets, driven by the ongoing regional conflict with no clear resolution in sight.
CBE policy rates remain a key benchmark for short-term interest rate trends in the Egyptian pound, influencing returns on savings instruments, lending rates, and yields on local currency government debt.
Global economic outlook
The MPC noted that global growth prospects have weakened amid escalating regional tensions, which have increased uncertainty and disrupted international trade flows. It added that rising energy and agricultural commodity prices—driven by supply chain disruptions and higher shipping insurance costs—have renewed upward pressures on global inflation.
In response, central banks in both advanced and emerging economies have adopted a cautious stance, either holding rates steady or slowing the pace of monetary easing. These developments, the committee said, are likely to weigh on external demand and heighten the risk of negative spillovers to domestic economic activity.
The global outlook remains highly uncertain, with the trajectory of growth and inflation dependent on the severity and duration of geopolitical shocks and their impact on supply chains.
Real GDP growth
On the domestic front, the MPC indicated that CBE estimates point to a moderation in real GDP growth to around 4.8-5% in the first quarter of the current year, down from 5.3% in Q4 2025.
Growth in Q4 2025 was primarily supported by strong contributions from non-oil manufacturing, trade, and communications, which are expected to continue underpinning economic activity through the remainder of the current fiscal year.
However, in light of ongoing regional tensions, the CBE has revised down its real GDP growth forecast to 4.9% for FY 2025/2026, compared to 5.1% projected at the previous MPC meeting in February 2026. Output is now expected to remain below potential for a longer period than previously anticipated, suggesting that demand-side inflationary pressures will remain contained in the near term.
Inflation developments
On inflation, the MPC noted that annual headline inflation rose to 13.4% in February 2026, up from 11.9% in January, while core inflation increased to 12.7% from 11.2% over the same period.
It explained that February’s inflation readings exceeded typical seasonal patterns, driven mainly by annual increases in education fees and related expenses. Additionally, prices of fresh vegetables and fruits rose due to seasonal consumption patterns associated with Ramadan, while other food prices remained broadly stable.
Impact of the regional conflict
The MPC said the ongoing regional conflict has materialised the upside risks highlighted in its February statement, disrupting the relative stability in inflation observed recently and slowing its disinflation path.
The conflict has triggered a global energy shock and heightened risk aversion, leading to a notable shift in economic expectations, particularly in emerging markets. Domestically, these effects have been transmitted through fiscal consolidation measures and exchange rate volatility, which act as key shock absorbers to mitigate pressures on economic activity and international reserves.
As a result, the inflation outlook and the CBE’s 7% (±2%) target for Q4 2026 are now subject to increasing upside risks, including the potential for a prolonged conflict and stronger-than-expected fiscal tightening.
Pause in monetary easing
In light of these developments, the MPC has opted to pause its monetary easing cycle and adopt a wait-and-see approach by maintaining current policy rates, supported by a positive real interest rate margin that preserves a restrictive monetary stance.
The committee said this approach will help anchor inflation expectations, contain price pressures, and restore the downward trajectory of inflation. It added that future policy decisions will remain data-dependent, guided by evolving risks and forecasts, while reaffirming its commitment to using all available tools to achieve medium-term price stability.
