Dovish CBE policy leaves EM investors disappointed: Would-be emerging market investors looking to return to Egypt after January’s devaluations were disappointed by the Central Bank of Egypt’s decision not to hike interest rates last week, analysts tell Bloomberg.

Flashback: The central bank chose to leave interest rates unchanged at its policy meeting last week, defying analyst expectations which had forecast rates to rise by at least 100 bps following last month’s currency devaluation. The CBE said it was waiting to see the impact of its huge 300-bps hike in December before increasing the policy rate further.

Record yields: Yields on EGP-debt have climbed sharply since the devaluation in early January. Lower demand has caused the yield on one-year t-bills to surge more than 400 bps over the past four weeks to a record high of 22.1%. Currently, almost the entire yield curve is above 22%, with only the extreme short- and long-ends of the curve lower.

But real rates remain low: Yields remain low on an inflation-adjusted basis as local prices soar. Annual urban inflation was running at a five-year high of 21.3% in December, squeezing real returns for portfolio investors.

And they could be about to turn negative: Inflation data is expected to show this week that prices continued accelerating in January, with analysts forecasting urban inflation to hit 23.75%.

Investors want higher rates: Investors were left disappointed by the central bank’s decision to hold rates, Edwin Gutierrez, head of emerging-market sovereign debt at abrdn, told the news outlet. “We think it’s a policy mistake and definitely caused some investors to rethink,” he said.

It’s investors’ turn to wait and see: “The dovish surprise can’t help but lead to some second-guessing of the bank’s commitment to inflation and is just one more reason to wait for further clarity before jumping back into the local market,” said an analyst at Columbia Threadneedle Investments.

Just last month investors were talking of buying bonds again, but are moving with caution after last week's CBE rate’s policy. The pause “may have interrupted the recent momentum of policy decisions, which have been tentatively recreating the conditions for an attractive carry trade in the EGP,” Goldman Sachs strategists wrote in a note.

Don’t expect rates to stay where they are in the coming months: Analysts expect the central bank to move on rates in coming meetings in response to rising inflation. Abu Dhabi Commercial Bank thinks rates will rise by another 300 bps over the first six months of the year.

Downgraded: The comments come a day after Moody’s downgraded Egypt’s credit rating to B3 — its first cut since 2013 — warning that transitioning to more sustainable sources of inflows will not reduce the country’s external vulnerabilities overnight. “While the situation may stabilize, Moody's does not expect Egypt's liquidity and external positions to rebound quickly,” it said.