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Arab Finance: The Central Bank of Egypt (CBE) is likely to raise interest rates by 2% at its upcoming May and July meetings, Goldman Sachs expected in a recent report.
The financial institution attributed the forecast to rising inflation risks driven by increased energy prices and continued pressure on supply chains due to geopolitical tensions in the Middle East.
As for inflation rates, Goldman Sachs raised its forecast after February's inflation data came in higher than expected. Also, it elaborated that higher energy prices caused by the Iran war will affect domestic prices, particularly after fuel prices in Egypt increased by up to 17% last March.
Likewise, the commodities research team raised its global oil price forecasts, citing additional indicators of escalating domestic inflationary pressures. These include a 25% surge in train and metro fares, as well as a sharp rise in fertilizer costs in line with global prices.
As a result, essential agricultural commodities have been affected, which indicates an acceleration in food inflation in the coming weeks and months.
The report highlighted that the Egyptian pound’s nominal effective exchange rate retreated by around 11% since the start of the US-Iran war, adding further pressure on prices.
In this regard, Goldman Sachs expects annual inflation to peak at 17.6% in August, nearly 3% higher than its previous forecast. It also anticipates inflation to reach around 16.8% by year-end, compared to its previous forecast of 13.4%, before falling below 10% in the second half (H2) of 2027.
Recent estimations assume that supply-side pressures are temporary and likely to largely dissipate during H2 2026, taking into account a potential further increase in fuel prices next October in accordance with hiking global oil prices.
Goldman Sachs believes the risks behind these forecasts are balanced, with two scenarios in case the energy and supply crisis lasts longer, and if the conflict ends and the pressures ease sooner than expected.
The real interest rate in Egypt currently stands at around 5.6%, providing a margin to absorb an increase in inflation of 2 percentage points. However, with inflation expected to rise by about 4 percentage points by the end of the summer, not adjusting nominal interest rates could push the real interest rate below 2%, potentially prompting the central bank to take action.
The report pointed out that the Monetary Policy Committee (MPC) has adopted a cautious, data-driven approach over the past 18 months as part of its shift towards inflation targeting and cutting reliance on the exchange rate as a price forecasting tool.
Hence, Goldman Sachs anticipates that the CBE would strive to maintain a real interest rate margin of at least 4% in the near term, indicating the possibility of interest rate hikes of approximately 100 basis points (bps) in the second and third quarters of 2026, totaling 200 bps.
If inflation begins to decline in Q1 2027, the central bank will return to a monetary easing cycle, reaching a final interest rate of 13% in Q1 2028, which means a cumulative reduction of about 700 bps during 2027.
On April 2nd, the CBE’s MPC decided to keep key policy rates unchanged, maintaining its current monetary stance.
Recently, President Abdel Fattah El-Sisi reviewed developments in Egypt’s current economic performance, including efforts to reduce inflation, increase foreign currency inflows, and strengthen reserve indicators.
The president discussed ongoing economic and structural reforms, as well as measures taken by the state, particularly the CBE and the banking sector, in light of current regional developments.
