CBE to raise interest rates by at least 200 bps this week -poll

The Central Bank of Egypt (CBE) will raise interest rates by at least 200 bps when it meets on Thursday as it tries to put a lid on soaring inflation amid continued pressure on the EGP, according to a poll of analysts we conducted last week. Six of seven respondents see the central further tightening policy, with three expecting policymakers to raise rates by 200 bps and two penciling in a 300-bps hike.

Where we stand: The overnight deposit rate is 16.25%, while the overnight lending rate is 17.25% and the main operation and disc. rates are at 16.75%. The CBE has raised rates by 800 bps over the past year, including a large 300-bps increase in December, but in a surprise move opted to leave them unchanged at its last meeting in February.

Inflationary pressures are to blame: “We expect the Monetary Policy Committee to continue tightening policy rates by around 200 bps to tame increasing inflation rates, which we expect to continue rising,” said HC Securities banking and macro analyst Heba Monir. Prime Securities Head of Research Amr El Alfy is also expecting a 200 bps hike.

Inflation surged to a fresh high in February on the back of a record increase in food prices. The follow-through effects of the EGP devaluation in January caused headline inflation to hit its highest level since July 2017, while core inflation hit a record high.

More aggressive tightening could be on the table: Economist Mona Bedeir is predicting a 200 bps increase but “wouldn’t be shocked if the CBE opts for a more aggressive hike and raises its policy rate by 300 bps,” she told us, citing the pressure on the exchange rate and the expected inflation trajectory. Hany Aboul Fotouh, a veteran of CI Capital, Arab Banking Corporation, and HSBC, is also expecting a 200-300 bps hike.

Inflation isn’t coming down any time soon: HC Securities is expecting inflation to continue to increase for the coming months, peaking at almost 36% by July before falling back to 30.3% by the end of the year. Inflation will be driven by the recent fuel-price hikes, the devaluation of the EGP, the ongoing poultry shortage, and the expected rise in electricity prices from 1 July, Monir said. HC Securities is expecting inflation to fall to 21.5% in March 2024, while Prime Holding sees it averaging 27% through this year.

A lot is contingent on what happens with the government’s privatization program: “The upside risk on this estimate is heavily dependent on the magnitude of USD / EGP movements,” Bedeir said. ”Delays to the IMF-backed reforms, privatization plans, or Gulf investor inflows will put pressure on the currency and inflation.”

The CBE’s inflation targets are looking out of reach: The CBE is sticking with its current inflation target of 7% (± 2%) through to 4Q 2024, but wants to bring inflation down to 5% (± 2 percentage points) by 4Q 2026. “Even as inflation slows later in the year, we do not envisage it will fall back within the CBE’s target range of 7% (± 2%) until mid-2024 at the earliest,” Capital Economics’ James Swanston wrote in a note.

One vote for leaving rates unchanged: Faisal Islamic Brokerage’s head of research, Hesham El Shebeini was the sole respondent to predict leave rates unchanged. “We believe that there will not be any further interest rate hikes by the CBE down the road. We believe that an interest rate cut will be in sight within 2024 or so,” he said.