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The Central Bank of Egypt is expected to leave interest rates unchanged when it meets on Thursday ahead of a potential currency devaluation in the coming months, 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, citing slowing monthly inflation and the need to retain policy space in response to further currency weakness later down the road.
Where rates currently stand: The overnight deposit rate stands at 19.25%, while the overnight lending rate is 20.25%, and the main operation and disc. rates are at 19.75%.
#1- The inflation waiting game: Several analysts said that the central bank is unlikely to raise interest rates for a second consecutive meeting to counter inflation, and will prefer to assess how the previous hikes are impacting the economy. The MPC is expected to hold rates in the upcoming meeting, “considering the impact of the previous increase approved in August, which has not yet become clear in terms of inflation,” EFG Hermes chief economist Mohamed Abu Basha told Enterprise.
Remember: The central bank has increased rates by 1.1k bps since March 2022, with 300 bps of hikes coming this year. The MPC last raised rates in August when it decided on a 100-bps hike.
Inflation is showing signs of moderating: Though annual inflation clocked a new record high in August, on a monthly basis price growth slowed for the third consecutive month to 1.6%, indicating weakening price pressures. Given this, there is “no need” for the central bank to raise rates this week when it will likely need to soon make moves following the expected devaluation of the EGP, said Beltone Financial’s head of research Ahmed Hafez.
Don’t be surprised if the trend ends this month: Several analysts said that shortages of imported goods and the ongoing FX crunch will offset a strengthening base effect in the final quarter of 2023 and heading into 2024. Securities banking and macro analyst Heba Monir said these factors will push monthly inflation to accelerate to 1.8% and the annual rate to notch a fresh record high of 37.8% in September.
#2- Policy space is going to be important going forward: Economic analyst Hany Geneina believes the CBE will pause on Thursday to “gather ammunition for a significant hike in the fourth quarter of 2023,” predicting an increase of 200-300 bps.
Remember: Analysts broadly expect the central bank to devalue the currency again to coincide with the IMF’s anticipated review of the USD 3 bn loan program. Despite committing to a flexible exchange rate under the loan agreement, the EGP-USD rate has remained fixed for the past six months, contributing to the IMF’s decision to postpone the review.
We could be looking at a 30% decline over the next year: Non-deliverable forward contracts currently indicate an expectation for the EGP to reach 32.65 / USD within three months and 41.5 / USD within 12 months, according to banking expert Hany Aboul Fotouh.
How far could the CBE move? Analysts expect the CBE to move aggressively if and when a devaluation comes, with EFG Hermes’ Abu Basha forecasting a 200-bps hike and Hany Geneina penciling in a 200-300-bps increase.
A tough time for forecasters: “The MPC meetings until the end of the year are surrounded by a lot of ambiguity and lack of clarity,” said economist Mona Bedeir. “There is no clear path for monetary policy in Egypt, which is closely linked to the escalating inflation figures fueled by expectations of a depreciation of the EGP and the ongoing foreign exchange crisis.”
Inflation: where’s the peak? Analysts broadly see inflation continuing its upward trajectory through the end of 2023, though there’s little consensus about where and when the peak might come. On the lower end, EFG Hermes’ Abu Basha is forecasting inflation to average 34% in 4Q 2023 before slowing to an average 27% by the end of the fiscal year in June. More pessimistically, Hany Aboul Fotouh thinks it could exceed 40% before the end of the year and exceed 45% in 2Q 2024 in the event of a currency devaluation and a slowdown of the government’s asset sale program.
