CBE expects inflation to accelerate through Q3 2026 before gradual decline towards target
The Central Bank of Egypt (CBE) expects annual headline inflation to accelerate through the third quarter (Q3) of 2026, driven partly by unfavourable base effects, supply-side pressures linked to ongoing regional conflict, exchange-rate movements and fiscal adjustment measures.
Earlier on Thursday, the Monetary Policy Committee (MPC) decided at its third meeting of the year to keep key interest rates unchanged, marking the second consecutive hold following a similar decision on 2 April. The rates remain an important indicator of the short-term direction of pound-denominated interest rates.
The overnight deposit rate was maintained at 19%, the overnight lending rate at 20%, while the main operation rate and the credit and discount rate remain at 19.5%.
In a statement, the MPC said the decision reflected its assessment of recent inflation developments and the outlook ahead, amid an external environment marked by elevated uncertainty.
The committee noted that inflation eased slightly in April, with annual headline inflation falling to 14.9% from 15.2% in March, while annual core inflation declined to 13.8% from 14%.
It attributed the slowdown in monthly headline inflation primarily to a sharp moderation in food inflation, which offset the seasonal increase recorded in the previous month. Non-food inflation also remained broadly stable, suggesting that the impact of the March 2026 energy price adjustments was temporary and did not generate wider inflationary spillovers.
Inflation expected to remain above target
According to the central bank, annual headline inflation is expected to exceed its target range of 7% (±2%) on average during the final quarter of 2026 before gradually declining from the first quarter of 2027, approaching target levels in the second half of that year.
The CBE said this trajectory would be supported by a restrictive monetary policy stance, continued monitoring of inflationary pressures, monthly price developments, anchored inflation expectations and a sustained commitment to exchange-rate flexibility.
However, the bank cautioned that the inflation outlook remains exposed to upside risks, particularly the possibility of prolonged regional conflict and stronger-than-anticipated effects from fiscal adjustment measures.
GDP growth expected to slow
The central bank also said real GDP growth moderated slightly to 5% in the first quarter of 2026, compared with 5.3% in the fourth quarter of 2025.
It expects growth to slow further in the second quarter amid the ongoing regional conflict.
Accordingly, the CBE projects real GDP growth of around 5% for the 2025/2026 fiscal year, while economic output is expected to remain below full capacity until the first half of 2027.
The bank said the current output gap suggests demand-side inflationary pressures will remain limited in the near term, reflecting the prevailing monetary policy stance over the forecast horizon.
Regarding labour market conditions, the central bank noted that the unemployment rate stood at 6.0% in the first quarter of 2026, down from 6.2% in the final quarter of 2025.
Global economy faces persistent uncertainty
The CBE said global economic activity continued to expand at a modest pace despite persistent geopolitical tensions, uncertainty surrounding trade policies and subdued global demand.
It added that recent inflation trends have led major central banks to maintain cautious monetary policy approaches.
Commodity markets, meanwhile, have experienced heightened volatility. The bank pointed to sharp increases in Brent crude oil and natural gas prices amid escalating geopolitical tensions affecting global energy supplies.
Agricultural commodity prices have also come under upward pressure, partly due to higher fertiliser costs following increases in gas prices, in addition to rising risk premiums on international trade.
The central bank warned that the global outlook remains vulnerable to escalating geopolitical tensions, supply-chain disruptions and adverse shifts in trade policies.
Interest rates held amid uncertainty
Against this backdrop, the MPC decided to maintain key interest rates, citing inflation dynamics and prevailing uncertainty.
The CBE said the decision provides additional time to assess the indirect effects of current supply shocks on inflation, particularly given the existence of a positive real interest rate margin over the forecast horizon.
The committee reiterated that future policy decisions will continue to aim at steering inflation towards its target range in the second half of 2027, while taking into account evolving economic conditions, inflation expectations and surrounding risks.
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المصدر: Daily News Egypt