CBE to keep rates unchanged on Thursday -poll

The Central Bank of Egypt (CBE) will leave interest rates unchanged when it meets on Thursday as officials opt for policy stability while the banking system shores up FX reserves ahead of an anticipated devaluation later this year, according to our interest rate poll. All of the seven analysts and economists we surveyed expect the Monetary Policy Committee (MPC) to hold rates steady.

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 the previous two monetary policy meetings in May and June.

Waiting for FX: A number of analysts told us that the central bank will likely hold off on making further interest-rate adjustments until the banking system has built up its FX reserves ahead of the expected currency devaluation later in the year. “Raising interest rates will be closely linked to the movement in the official exchange rate, which is not expected to happen before the fourth quarter of 2023,” Al Ahly Pharos told Enterprise. Meanwhile, economist Mona Bedeir expects the CBE to move when FX revenue streams from the privatization program begin to pick up.

Remember: A number of local and Gulf investors have agreed in principle to acquire USD 1.9 bn of state-owned assets under the state privatization program, USD 1.65 bn of which will be paid in FX. The government expects to finalize agreements next month and receive the proceeds by September.

Higher rates won’t do much to bring in FX: One-year government bonds are currently offering a real rate of -6.41% due to the soaring inflation rate, Mounir said. Negative real yields are continuing to push investors out of government bonds, with USD 3.4 bn exiting the local debt market during the first nine months of FY 2022-23. “This suggests that an interest rate hike to attract portfolio inflows is unlikely in the upcoming MPC meeting until Egypt sorts out its USD liquidity shortage,” she said.

Most Egypt watchers say the next deval is unlikely before September or October: A number of global investment banks — most recently Morgan Stanley — now think it unlikely officials will allow the EGP to slide against the greenback before September or October, which is when most expect the IMF to finally conduct the first review of the loan program. Capital Economics expects authorities to let the currency fall to 35 / USD by the end of the year from 30.9 currently, it said in a note last week.

What about the record-high inflation? Higher rates may not do much. Banking expe rt Mohamed Abdel Aal believes that monetary policy is now unable to have much of an impact on controlling inflation due to the impact of the weaker EGP. “The MPC raised interest rates by 1000 bps over the past 16 months, but inflation remains far behind the official target figure. This proves that the exchange rate has the most direct and correlated effect on inflation,” he said. “Addressing the persistent strains on the currency, and putting a break on further devaluations, is key to containing this inflation.”

The CBE seems to think the same thing: Governor Hassan Abdalla said earlier this year that the central bank will need to turn to other policy measures to rein in inflation due to the supply-side factors fuelling price increases.

Remember: Inflation hit a record high in June, with the annual urban rate accelerating to 35.7% from 32.7% the month before.

It’s expected to move higher: Several analysts believe that Inflation is still yet to peak. “We expect Egypt's inflation to continue rising by 2% m-o-m and record 36.6% y-o-y for July as the supply shortages, caused by import curbs and lack of USD availability,” said Mounir. Meanwhile, Bedeir expects inflation to peak in October on the back of a devaluation.

Keeping borrowing costs in check: A number of analysts said the central bank is likely to tread carefully regarding future rate hikes due to the impact on the government’s borrowing costs. This week’s meeting will be a chance for the central “to evaluate the impact of previous hikes, so it can utilize other monetary policy methods to contain inflation without affecting the cost of government borrowing,” banking vetera n Hany Aboul Fotouh told us.

If there is a hike… Though its current base is for a 200-bps increase in September, Capital Economics isn’t ruling out a hike in August, writing that there is a “growing risk” that policymakers could move this week due to accelerating inflation. Bedeir says there remains a possibility that the MPC could raise rates by 100 bps but this will depend on whether FX liquidity improves and releases pent-up demand for greenbacks.