To hike, or not to hike: Analysts are split on what the Central Bank of Egypt (CBE) will do when its Monetary Policy Committee (MPC) meets this Thursday. Four of the nine analysts we spoke to see the central bank leaving rates unchanged on the back of declining inflation and expectations that this trend will continue throughout the year. Two others see the bank moving forward with rate hikes ranging between 150-200 pbs, while the rest didn’t give us a straightforward answer.

The last three CBE meetings have been fairly uneventful: The central bank has held interest rates steady during its past three meetings in December, 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.

Hiking rates now could cause more harm than good: An interest hike now for any of the world’s central banks could slow economic growth as economies navigate their way around a global rise in energy and food prices, and in Egypt’s case exacerbate ongoing pressures to do with unemployment and economic performance, banking expert Hany Aboul Fotouh (LinkedIn) told Enterprise.

And on top of that, interest hikes as a monetary policy tool may currently not be that effective — for now, at least: “Our circumstances and problems in Egypt are different from the circumstances and problems of other countries that fight inflation by raising interest and focusing on policy,” banking expert and EG Bank board member Mohamed Abdel Aal told us. Before being able to use raising interest rates as a fiscal tool to rein in inflation, we must “first strive to achieve exchange rate stability,” Abdel Aal said. However, he added that, unlike his previous assessment back in October, inflation “has begun to interact — albeit marginally — with interest rate changes.”

Inflation has been on a downward trajectory, but some don’t think this will last: Annual urban inflation eased for the third consecutive month in December to 33.7% — its lowest level in seven months. HC Securities’ Heba Mounir told Enterprise that they expect annual headline inflation to jump back up to 36.3% in January on the back of pricier telecoms services, Metro tickets, and household electricity bills combined with an increase of money supply from recentlymaturing high-yield certificates of deposits.

In defense of a rate hike: "The latest IMF's comments on the loan program review and ongoing discussions signal a shift in priorities toward inflation targeting, suggesting a probable monetary tightening in the coming months. That said, we expect a 150-200 bps hike in the upcoming meeting", Ahmed Hafez, Head of Research at Beltone Holding, told Enterprise. Economist Mona Bedeir also sees the bank moving forward with a 200 bps rate hike when it meets “because monetary tightening has become an urgent necessity at the current stage.”

A devaluation could change things:Mounir told us that they “don’t rule out a policy rate hike” in the event of a devaluation, which they see happening following the conclusion of the IMF’s first and second reviews of our USD 3 bn loan agreement, alongside the “doubling, if not more” the value of the support package. Mirroring this viewpoint, Aboul Fotouh added that a devaluation could force the central bank to raise rates “to attract more foreign investment and prevent dollarization.”

A rate hike should be paired with a devaluation regardless the timing, a number of analysts suggest. "The central bank could raise rates by as much as 500 bps accompanied by a devaluation," Zilla Capital’s Head of Research Aya Zoheir said without specifying when this might happen. Meanwhile, economist Ali Metwally penciled in a 300 bps rate hike, paired with a devaluation that will see the EGP trading at 40 against greenback or 55 “if we’re being pessimistic.” Metwally also stopped short of specifying when this might happen.

And one is left undecided: EFG Hermes lead MENA economist Mohamed Abu Basha sees the CBE swinging either way — leaving rates unchanged or moving forward with a 200-300 bps rate hike.

All eyes on the IMF: A large number of the analysts surveyed said that the pending updates on the future of our IMF package will play a big role in the CBE’s next move. “The bank’s decision will depend on the stage of negotiations with the IMF,” Abu Basha said. Representatives from the IMF were in town last week to discuss the two long-awaited stalled reviews of the loan program and an IMF spokesperson said promised updates when the visit wraps up, which should be any day now.

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