CBE hikes rates for first time since August

The Central Bank of Egypt (CBE) hiked interest rates by 200 basis points at its first Monetary Policy Committee meeting of the year on Thursday, it said in a statement (pdf). The first rate hike since August aims to reinforce the downward trajectory of inflation as pressures mount amid geopolitical uncertainty, disruption of shipping in the Red Sea, and supply chain setbacks “raised uncertainty surrounding the inflation outlook.”

Where rates now stand: The Monetary Policy Committee (MPC) raised rates by 200 bps, leaving the overnight deposit rate to 21.25%, the overnight lending rate to 22.25%, and the main operation and disc. rates to 21.75%.

Only a few saw this coming: Only two of the nine analysts we spoke to for our customary interest rate poll anticipated the hike. Ahmed Hafez, head of Research at Beltone Holding, predicted a 150-200 bps hike as ongoing discussions with the IMF have signaled a shift in priorities toward inflation targeting, suggesting a probable monetary tightening in the coming months. Meanwhile, Economist Mona Bedeir deemed monetary tightening “an urgent necessity at the current stage.”

Another step towards a larger IMF package: “Given the ongoing talks and discussions with the IMF and that we’re so close to reaching a staff-level agreement, I’m sure that part of [the conditions] include further monetary tightening,” Hafez told Enterprise. “I don’t think this 200 bps hike is the end of it. Our initial expectation was of a 300 bps hike during the first half of 2024 … Another 100-200 bps hike should be enough to anchor inflation expectations,” Hafez said.

Further hikes down the road? The anticipated currency devaluation will likely be paired with interest rate hikes, analysts suggest. Two of those we spoke to for our poll expected the CBE to move forward with a devaluation paired with a rate hike, without specifying when it could happen — Zilla Capital’s Head of Research Aya Zoheir saw the CBE raising rates by 300-500 bps in tandem with a devaluation, while IBIS Consulting Economist Ali Metwally penciled in a 300 bps rate hike paired with a devaluation that will see the EGP trading at 40-55 against the greenback. Abu Dhabi Commercial Bank’s Monica Malek separately told Reuters that the hike likely comes ahead of a widely anticipated devaluation of the EGP and the announcement of a larger IMF package.

It’s all about timing, suggests Goldman Sachs’ Farouk Soussa. “The authorities’ preferred strategy is to bring the parallel rate under control before unifying the exchange rate,” he told Bloomberg. “This means bringing demand for USD down through tighter policies and increasing supply through external borrowing. When the parallel rate is at a more reasonable level, the unification of the currency becomes easier through a devaluation.” The rate hike could be seen as a first step in that process, the business information service suggests.

Speaking of: Societe Generale sees the government devaluing to 40-45 against the greenback, up from the current official rate of EGP 30.9, Asharq Business reported, citing a research note from the bank.

The rate hikes got ink in the foreign press: Reuters | Bloomberg.