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Monday, 22 May 2017

MPC hikes key interest rates 200 bps

The central bank unexpectedly hiked interest rates last night by 200 bps to a new recordhigh: The Central Bank of Egypt’s Monetary Policy Committee moved against market expectations on Sunday night when it decided to raise key interest rates by 200 bps, bringing the overnight deposit rate up to 16.75%, overnight lending rate to 17.75%, and discount rate to 17.25%, according to a CBE statement. Despite monthly inflation levels being on a cooling trend, annual rates are still high, leading the MPC to decide “that tightening monetary conditions warranted a commitment to its price stability mandate.” While monthly headline inflation cooled to 1.69% in April (“its third consecutive month of decline due to fading cost-push pressures”), the MPC suggested it was concerned that “core inflation which excludes volatile food items grew by 1.10 percent (m/m) in April, recording a slight increase after decelerating in February and March.”

Throw in the 300 bps bump that accompanied the float of the EGP and interest rates are up500 bps since November.

The hike is “consistent with the targeted disinflation path,” the central bank said,and is in line with the CBE’s view that inflation will cool to something in the 13% band by the end of 2018 “and to single digits thereafter.” So why is a rate hike the way to go? In the language of the MPC, a rate hike can be used to “contain demand-side pressures and second-round effects resulting from supply shocks that may lead to deviations from inflation targets, as well as to achieve reserve money targets that were designed to be consistent with the inflation targets.”

It’s hard not to see the IMF’s hand at play here. Our friends in the banking community and just about every analyst with whom Bloomberg and Reuters spoke for their respective polls in the run up to yesterday said the rate hike was a bad idea. It would, Bloomberg said, be “counterproductive because the price gains are not being driven by excess demand.” To say nothing about interest rates being a lousy means of transmitting monetary policy in a nation as un-banked as ours, where (generously) perhaps one in five citizens has access to the banking system and SMEs still struggle to qualify for credit. And yet the IMF has — at the highest levels — made clear since April that an interest rate hike was the way to go to curb inflation. It could work. Then again, if our aunt underwent gender reassignment surgery, she could become our uncle.

REAX: Bloomberg quotes Arqaam Capital’s Reham El-Desoki as explaining that the decision “is the textbook answer to high inflation, but the data and the weak transmission channels in Egypt do not warrant an additional rate increase.”

Why would you invest in your business today? As an earlier research note from Arqaam noted before last night’s rate hike, a 200 bps rise in interest rates “would render investment irrational at such high cost of debt.” And don’t get us started on (a) the staggering implications on the cost of borrowing for the state or (b) the shift in the nation’s long-term debt structure if the treasury keeps tapping international debt markets in foreign currency because it’s so much more affordable to borrow in hard currency.

You can catch early news pieces on the late-night hike from Reuters and Bloomberg, and we’ll have a proper roundup of reactions for you tomorrow.

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