The Central Bank of Egypt (CBE) kept interest rates unchanged on Thursday after inflation eased slightly in April, it said in a statement (pdf) following its policy meeting. The Monetary Policy Committee (MPC) left the deposit rate at 18.25%, the lending rate at 19.25%, and the main operation and disc. rates at 18.75%.

The rationale: The CBE said it would hold rates as it continues to assess the impact of the 1k-bps worth of rate hikes implemented in the past 15 months — including the large 200-bps increase the MPC made at its last meeting in March — as well as the 400-bps increase it made in September to the required reserve ratio for banks. The MPC statement said its decision was informed by cooling global and domestic inflation on the back of lower energy prices and better supply chain conditions, as well as the “early signs of economic activity slowdown” at home.

REMEMBER- Inflation eased for the first time in 10 months in April, inching down to 30.6% y-o-y from 32.7% the month before, thanks to a favorable base effect, the stabilization of the EGP-USD exchange rate, and a slight slowdown in food price inflation. Consumer prices are widely expected to pick up again in the coming months on the back of an anticipated devaluation, price hikes fordiesel andsubsidized commodities, and seasonal factors including the upcoming Eid.

The CBE’s move was expected: Seven of 10 analysts in our pollpredicted the decision, explaining that April’s cooler inflation reading gives the CBE the room to assess the impact of earlier hikes and avoid raising the cost of public borrowing. Eight of 11 economists in a Bloombergpoll also saw policymakers holding rates steady. CBE Governor Hassan Abdalla last month voiced caution over any further hikes, saying other policy measures may be needed to rein in price hikes and address supply bottlenecks that have pressured imports.

The CBE’s next interest rate move could depend on the FX rate: “I think the key thing is what's happening with the currency issue,” Bloomberg chief EM economist Ziad Daoud told Bloomberg TV (watch, runtime: 6:59), suggesting that the central bank could hike rates if inflation is spurred once more by a further depreciation of the EGP. “Until Egypt resolves it and does the next round of devaluation, they’ll probably hold rates,” he added. Arqaam Capital’s Zeina Rizk told Bloomberg ahead of Thursday’s decision that policymakers “should continue hiking, but it should come in tandem with a devaluation.” The EGP hasn’t moved against the USD since mid-March after losing more than half of its value against the greenback in the past year.

EGP WATCH-

EGP rallies on black market amid dampened USD demand: The EGP has gained 12% on the parallel market over the past week to come in at 37 to the USD on Thursday, up from 42 the previous Friday, Bloomberg reports. The upturn comes on the back of weakened demand for the greenback, triggered in part by requests from the Egyptian Automotive Dealers Association to its members to stop buying from the black market, the news outlet reports.

The next deval is looking increasingly distant: The EGP’s one-month non-deliverable forwards (NDFs) gained 2.4% to about 31.8 to the USD on Thursday — its strongest since 2 March and down from a record high of 35.3 on 25 April — suggesting that traders see the local currency falling at a softer pace than previously thought. The official exchange rate has sat at 30.96 since 12 March.

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