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%. Rates have risen 1.1k bps since March 2022.

Interest rate hikes seem to be losing their ability to curb inflation: Several analysts said that the central bank is unlikely to raise interest rates further because the policy tool seems to be losing its ability to control inflation. “In my opinion, the stubborn inflation rate has now lost the ability to interact with interest rate changes,” banking expert Mohamed Abdel Aal told Enterprise.

Inflation at record highs despite aggressive hikes: Inflation reached a fresh all-time high of 38% last month and has been running above 30% since February, despite the central bank aggressively raising interest rates to their highest levels since the early 1990s. Zilla Capital’s Aya Zoheir puts this down to the FX crunch. The central bank is “fully convinced that without abundant USD liquidity in the exchange market, the interest rate tool will not achieve any targeted effect of reducing inflation,” she told us.

Weighing the costs: “Raising the interest rate alone during the current situation will be an additional burden on the budget without a significant desired benefit,” Al Ahly Pharos’ Israa Ahmed told Enterprise. A 100 bps increase in interest rates will add at least EGP 70 bn to the government’s interest bill, economic expert Medhat Nafie said.

Plus, inflation might be stabilizing: That’s according to EFG Hermes’ Mohamed Abu Basha, who expects the CBE to leave rates unchanged due to “the near-stability” of inflation rates.

The anticipated devaluation will be in mind: Policymakers will want to maximize the policy space available to them when they go ahead with the anticipated EGP devaluation at the end of this year or in early 2024. Any rate hikes done this week will limit how much they can tighten policy to stabilize the currency following the devaluation.

But the FX crunch may force the CBE to act sooner: A third of the analysts and economists that responded to our poll predicted that interest rates will be raised in Thursday’s meeting and pointed to FX shortages as one of the main culprits. HC Securities’ Heba Mounir expects it to raise rates by 100 bps to “defend the currency against dollarization and purchases of gold by Egyptian citizens,” followed by an additional 100 bps before the end of the year.

Volatility spiked in the parallel currency market last week: The EGP fell to a record low against the greenback in the black market last week in the wake of the central bank’s restrictions on credit card use. The FX liquidity squeeze and pressure on the exchange rate is going to require the CBE to raise rates by 200-300 bps during the next two MPC meetings, said Ali Metwally, an analyst at UK-based risk assessment firm Infospectrum. Meanwhile, Zilla Capital’s Aya Zoheir predicts a 150-200 bps rate hike at the December meeting.

Curb your inflation: While many of those polled mirrored banking expert Hany Aboul Fotouh’s predictions that the EGP “will continue to weaken against the USD in the medium term,” they also saw inflation peaking at 40%.

But it will be a bumpy path: Analysts told us that inflation is likely to rise rapidly after an expected currency devaluation but then begin a steady decline over the next few years. “The interest rate rise that will accompany [the devaluation], in addition to the base effect, will lead to a gradual decline in inflation to reach 24% on average next year and 9% in 2025, Metwally said.

Tags: