The Central Bank of Egypt is expected to begin the monetary easing cycle in September, with a cumulative 400 basis points (bps) rate cut by year-end, according to the National Bank of Kuwait (NBK).

The rate cut is anticipated given that inflation falls further through 2024, the bank said in its quarterly economy report on Egypt.

Inflation has decelerated over the past months from 27.5% in June, as real interest rates have turned positive for the first time since January 2022.

Additionally, the central bank has kept rates unchanged throughout Q2 (April to June) FY2 023/24 at 27.75% on the discount rate, while average one-year treasury bills have dropped by 2% since March to 26%, which implies that markets are looking at 1-2% in rate cuts in the coming period, the report said.

In May, the government received the final tranche of the Ras El Hekma investment deal from the UAE, worth $14 billion, and $11 billion in UAE deposits to be converted into EGP, pushing FX reserves to an all-time high of $46.3 billion as of June 2024.

"We see scope for sovereign credit rating upgrades on the back of a sustained flexible exchange rate regime, banking system net foreign assets moving back to positive territory, and post-election political stability," NBK added.

While asserting "major economic challenges still lie ahead", the report said that Egypt is emerging from its crisis stage due to critical one-off policy moves and deals, including the currency devaluation and mega-investment from the UAE.

Markets, investors and rating agencies will now be looking at what comes next and in particular for the government to embark on the second stage of the reform process, the bank stated.    

(Editing by Brinda Darasha; brinda.darasha@lseg.com)