CBE to keep rates unchanged on Thursday -poll

The Central Bank of Egypt (CBE) will keep interest rates unchanged when it meets on Thursday as the pace of global tightening begins to ease and prospects of a near-term EGP devaluation dim, according to our interest rate poll. Seven of the eight analysts we surveyed expect the CBE to hold rates steady, while the odd one out — economist Hany Genena — sees the CBE potentially swinging either way.

Where rates currently stand: The overnight deposit rate stands at 18.25% while the overnight lending rate is 19.25% and the main operation and disc. rates are at 18.75%. The central bank has hiked rates by 1k bps since March 2022 but left them unchanged during its latest monetary policy meeting in May.

Fed pause gives space for the CBE: The US Federal Reserve’s decision to keep rates on hold last week will allow the CBE more time to assess the impact of its recent rate hikes on the economy, several analysts tell us. “A potential hold on interest rates is likely as the CBE takes time to assess the situation and to hold off any moves that may increase the cost of public debt,” says Amr Elalfy, head of research at Prime Securities. Meanwhile, Hany Aboul Fotouh, a veteran of CI Capital, Arab Banking Corporation, and HSBC, says that a pause would “correspond to the Fed holding interest rates for the first time since March 2022 … The Fed’s decision impacted central banks all around the world and their decisions regarding monetary tightening.”

Keeping borrowing costs in check: HC Securities’ Heba Mounir also believes that that the central bank will keep rates on hold, citing the government’s “need to keep local debt servicing costs in check and stop increasing the burden on corporate borrowing” as well as President Abdel Fattah El Sisi’s recent suggestion that further EGP devaluations are off the cards. Economist Mona Bedeir had the same stance, saying that “the CBE will hold interest rates, since we see no further devaluation in the short-term.”

Expectations for a further devaluation have fallen in recent weeks: Even before the president appeared to rule out a further fall in the currency, a number of investment banks including Citi and Goldman Sachs had dropped their forecasts for an imminent devaluation this quarter on expectations for fresh FX inflows from tourism and the state offering program. Naeem Brokerage still believes that the central bank will move to a flexible exchange rate but only when there is sufficient FX liquidity, Allen Sandeep, the firm’s head of research, tells us. “Without that FX liquidity buffer being secured in advance, we don’t see any rationale for a standalone deval that would only lead to … another round of cost-push on the CPI index,” he says.

More rate hikes may not help rein in inflation, some say: Banking expert Mohamed Abdel Aal argues that the FX rate has a bigger impact on prices: “Over the past 15 months, the Monetary Policy Committee hiked interest rates by 10%. Yet, inflation did not recede and is still far from the official target figure — 7% (± 2%), which confirms that inflation figures are heavily linked to the exchange rate,” he says. CBE Governor Hassan Abdalla made a similar point in April, saying policy measures other than rate hikes may be needed to rein in price hikes and address supply bottlenecks that have pressured imports.

Inflation once again approached an all-time high in May: Annual urban inflation rose to 32.7% y-o-y in May from 30.6% the month before, marking a return to the near record high inflation recorded in March. Meanwhile, core inflation — often seen as a superior measure of price growth because it strips out volatile items such as food and fuel — rose to 40.3% y-o-y in May.

And it’s expected to move higher: “Assuming a stable exchange rate, we expect urban CPI to hover around 33% until June and to climb up to 34-35% by July / August,” Sandeep says, citing expectations for higher electricity and fuel prices in the coming months.

Could we see a surprise hike? One of the analysts we spoke to, Hany Genena, said the CBE could choose to make a significant hike of at least 200 bps if policymakers are planning to imminently allow a full float of the EGP in order to push through agreement with the IMF. In that scenario, rate hikes would be needed to attempt to keep a lid on the inflation that would result from the second-round effects of further depreciation and import pressures.

Further rate hikes may do more harm than good: “Any further rate hikes would only raise the cost of capital, deficit, and squeeze liquidity,” Sandeep says.