Arab Finance: The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) kept its key interest rates unchanged at its fifth meeting of 2026, citing inflation developments and continued uncertainty surrounding the global economic outlook, as per a statement on August 20.

The overnight deposit and lending rates remain at 19% and 20%, respectively, while the main operation and discount rates were both held at 19.5%.

Annual headline inflation edged up to 14.9% in July 2026 from 14.3% in June, while core inflation rose to 14.7% from 14.3%. The CBE attributed the increases largely to unfavorable base effects, noting that monthly headline and core inflation were unchanged at 0% and came in below expectations.

The monthly figures indicated broad price stability, with declines recorded across several items. According to the CBE, these developments suggest that the impact of earlier shocks is gradually fading and was primarily temporary.

Headline inflation is expected to accelerate on average during the third quarter (Q3) of 2026 due partly to base effects. However, the increase is now projected to be less pronounced than anticipated at the MPC’s July meeting following lower-than-expected inflation readings in June and July.

The CBE expects inflation to begin easing gradually in Q1 2027 and move toward its 7% target, within a range of 2 percentage points above or below that level, during the second half (H2) of next year. The projected decline is expected to be supported by tight monetary conditions, softer monthly underlying inflation, and cooling price pressures across components of the Consumer Price Index (CPI).

However, the inflation outlook remains exposed to upside risks, particularly a further escalation in regional hostilities and a stronger-than-anticipated impact from fiscal consolidation measures.

Economic momentum has also softened. The CBE’s nowcast points to a further slowdown in real economic activity during Q2 2026 as regional tensions weigh on performance, following real gross domestic product (GDP) growth of 5% in Q1.

Real GDP growth is projected to average around 5% in fiscal year (FY) 2025/2026. Although output is expected to remain below its potential in the near term, the CBE anticipates a gradual convergence toward potential output by the second half of 2027. This trajectory, alongside restrictive monetary policy, is expected to limit demand-driven inflationary pressures over the short term.

Internationally, economic activity has lost momentum amid geopolitical volatility and weak demand. Inflation remains elevated but varies across markets, prompting central banks to adopt different policy approaches according to their domestic conditions.

Regional tensions have renewed upward pressure on energy prices and increased market volatility. Agricultural commodity prices have also risen amid concerns over supplies, geopolitical developments, and unfavorable weather. The CBE said prolonged tensions, tighter financial conditions, and renewed supply-chain disruptions continue to cloud the global outlook.

By leaving rates unchanged, the MPC aims to preserve a sufficiently positive real interest rate, anchor inflation expectations, and support the expected disinflation process. The committee said future policy decisions would depend on economic developments, inflation forecasts, and the balance of risks, while reaffirming its readiness to adjust its stance to bring inflation back to target.