It’s looking like another uneventful MPC meeting: The Central Bank of Egypt (CBE) is expected to leave interest rates on hold when it meets this Thursday. Cooling inflation at home and the US Federal Reserve leaving rates unchanged last week will factor in the MPC’s thinking, analysts tell us. Seven of the nine we surveyed see the CBE holding rate steady when the Monetary Policy Committee (MPC) meets. The other two expect policy makers to raise rates, with one penciling in a 50-100-bps hike and the other a 200-300-bps hike.

This would be uneventful meeting #3: The central bank has held interest rates steady during its past two meetings in November and September. 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, with the bank last hiking rates in its August meeting.

Inflation has been cooling: Monthly urban inflation eased for the second consecutive month in November to 34.6% y-o-y — its lowest level in six months. Easing inflation came on the back of an increasingly favorable base effect, which could extend further, but that would be tied to the timing and scale of the anticipated currency float, Al Ahly Pharos’ Israa Ahmed told Enterprise. Inflation is expected to continue to ease in December, according to securities banking and macro analyst Heba Monir(LinkedIn), who sees annual urban inflation easing to 34.4% this month.

But more can be done: For rate hikes to have the desirable impact on inflation rates, currency stability is needed, banking expert Mohamed Abdel Aal said. “Raising rates means more costly borrowing for companies, forcing them to raise prices to help offset this increase in borrowing costs and creating even more inflationary pressure,” he said. He pointed to the shortage of exported goods and a weak EGP as some of the most important factors in determining inflation levels at the moment. The best way for the CBE to control EGP liquidity is by “providing FX liquidity alongside raising rates,” EFG Hermes Research said in a report.

Rate hikes will soon serve a different purpose: Interest rates, at a later time, will be an effective tool to accompany the anticipated float of the EGP against the USD as it protects the currency against dollarization, banking expert Tarek Metwally (LinkedIn) says. A float is widely expected at some point after the presidential election as authorities look to comply with the terms of the USD 3 bn IMF loan and release almost USD 700 mn in vital financing — and potentially a commitment to even more funding.

Don’t rule out a hike: There may be a need for “immediate monetary tightening” to contain inflation after the IMF shifted its focus from exchange rate policies to helping officials get a grip on soaring inflation, EFG Hermes Research said. Our friends at EFG Hermes are expecting the CBE to hike rates 200-300 bps when it meets, revising an earlier forecast that saw it leaving interest rates on hold.

It doesn’t have to be as drastic: The central bank may make do with a modest 50-100-bps hike to spare the already strained state budget the extra cost that comes with every rate hike, Ali Metwally, an analyst at UK-based risk assessment firm Infospectrum, told us. This is the most likely scenario, seeing as more drastic rate hikes “will push our debt burden and budget deficit higher and put us at risk of defaulting on payments and make Egyptian bonds even less appealing,” he said.

Tags: