Egypt Daily News – Goldman Sachs has forecast that Egypt’s central bank is likely to maintain elevated interest rates for a prolonged period, despite a drop in inflation recorded in June. The American investment bank ruled out any rate cuts before October, citing ongoing inflation risks and structural fiscal adjustments.
In its analysis following the Central Bank of Egypt’s recent monetary policy committee meeting, Goldman Sachs noted that Egyptian authorities signaled a “wait-and-see” approach regarding further monetary easing. The central bank highlighted medium-term upside risks to inflation, including upcoming adjustments in administered prices and potential reforms to value-added tax (VAT).
While the central bank did not specify the data it will monitor before altering policy, Goldman Sachs expects that any resumption of monetary easing will require a sustained drop in Egypt’s inflation rate. The bank anticipates a temporary spike in consumer price inflation over the next two months, reaching around 16% year-on-year, due to the July increase in cigarette prices and anticipated energy price hikes. Nevertheless, it projects inflation to ease to 13% by the end of 2025.
As a result, Goldman Sachs sees a rate cut in August as unlikely, making October the earliest feasible window for monetary easing. With no monetary policy meeting scheduled for September, the bank now expects no cuts in the third quarter, revising its earlier forecast of a 300-basis-point cut. It instead projects a more aggressive 400-basis-point reduction in the fourth quarter, ending 2025 with an overnight deposit rate at 20% rather than 18%.
Egypt’s Appeal to Investors
According to Goldman Sachs, Egypt’s high interest rate environment, coupled with a stable geopolitical backdrop, is reinforcing the country’s attractiveness to global investors. These conditions are expected to support increased portfolio inflows and sustained demand for the Egyptian pound (EGP) in the coming months.
The bank estimates Egypt’s overnight real interest rate at roughly 12%, placing it among the highest in frontier and high-yield emerging markets. It also highlighted the nominal 12-month interest rate differential, now exceeding 15%, as another driver of investment appeal.
Goldman Sachs believes these dynamics will persist until at least October, creating favorable conditions for long-duration carry trades in EGP assets. The report also emphasized that continued portfolio inflows could help stabilize the Egyptian pound’s exchange rate.
Since the March 2024 devaluation, the EGP has remained relatively stable, with the gap between official and parallel market rates effectively eliminated, reflecting improved confidence in Egypt’s foreign exchange outlook. This currency stability has endured despite multiple waves of geopolitical tension in the region throughout 2024.
Pound Fundamentals and Valuation
The report identifies two additional factors underpinning the pound’s resilience: first, the steady accumulation of foreign reserves, and second, a recovery in the banking sector’s net foreign assets, which reached a surplus of $4.8 billion in May, compared to a $17.6 billion deficit at the start of 2023.
Goldman Sachs also sees significant room for currency appreciation. Its valuation models suggest the Egyptian pound is undervalued by around 30% relative to peers in frontier markets, making it the second-most undervalued currency in that group. Even if the spot rate remains unchanged, the EGP is expected to remain undervalued by about 25% over the next 12 months.
On this basis, the bank reaffirmed its recommendation to take a short position on the U.S. dollar against the Egyptian pound (short USD/EGP), targeting a total return of 5% with a stop-loss at -2.5%. The strategy is based primarily on interest income accumulation in the coming quarter rather than expectations of exchange rate appreciation.
“We believe the current environment supports a stable or stronger pound, allowing the currency to outperform its implied path in non-deliverable forwards (NDFs),” the report stated.
Challenges for Policymakers
Despite the optimistic outlook, Goldman Sachs warned of several policy challenges. Chief among them is the high cost of maintaining elevated interest rates. Egypt’s real interest rate burden is particularly heavy due to its impact on public debt servicing, with interest payments now consuming roughly 80% of total government revenue and 90% of tax revenues, up from 55% before the COVID-19 pandemic. This leaves little fiscal space for public services or development investment.
The bank also cautioned against potential overvaluation concerns. While economic fundamentals could support a moderate appreciation of the EGP, authorities may be reluctant to allow a sharp rise, as a weaker pound has helped curb the current account deficit, already under pressure from a deteriorating energy balance and declining Suez Canal revenues.
Finally, Goldman Sachs flagged potential volatility in Egypt’s financial account. It estimates that foreign holdings in local debt markets have surpassed $20 billion, raising the risk of overcrowding and heightened sensitivity to shifts in investor sentiment. The report stressed the need for careful management of foreign exchange liquidity to mitigate the risks associated with such “hot money” flows.
