ENTERPRISE POLL- CBE expected to leave rates on hold when it meets this Thursday: The Central Bank of Egypt (CBE) will likely keep interest rates unchanged when its Monetary Policy Committee (MPC) meets this Thursday, according to an Enterprise poll. All 11 economists and analysts surveyed expect the MPC to leave rates on hold for the fifth consecutive meeting after its record 300 bps emergency cut in March.

Where rates stand currently: The CBE’s overnight deposit rate is at 9.25% and the lending rate is at 10.25%. The main operation and discount rates are both at 9.75%.

Don’t expect low inflation to prompt a resumption of the monetary easing cycle. Analysts say that the central bank is unlikely to be lured into cutting rates by low inflation, which fell to a 10-month low of 3.4% last month. “Our expectation is that the central bank will keep interest rates steady despite the decline in inflation,” said Mona Bedeir, senior economist at Prime Holding. “The central bank is reassured of its ability to achieve its inflationary goal and therefore its focus is on the stability of the exchange rate and the attractiveness of domestic debt instruments to compensate for the shortage of other foreign exchange sources of transfers.”

Most analysts are expecting inflation to tick up in the months ahead: Mohamed Abu Basha, EFG Hermes’ head of macroeconomic research, expects the annual inflation rate to average 5% in the coming months, with a slight uptick towards the end of 2020 due to the base effect. The recent doubling of an industry-support package of loans provided by the CBE to EGP 200 bn gives further impetus for a rate hold, Abu Basha added. Pharos’ head of research Radwa El Swaify and HC’s Monette Doss are of the same mind, with both expecting inflation to remain between 5-5.5% in the near future. El Swaify also expects the seasonal back-to-school uptick in inflation to raise the headline rate 1%. The central bank currently sees inflation averaging 6.2% in 4Q.

But then again, it might not: Renaissance Capital forecast in a research note last week that inflation will remain below the lower bound of the CBE’s 9% (+/- 3%) target inflation range through to the end of the year amid a continued slump in consumer demand.

Capital Economics, meanwhile, suggests that the CBE will keep rates on hold to support the EGP, which has rallied 1.6% against the greenback since the beginning of August. “Even though inflation will remain weak, that alone is unlikely to be enough to prompt policymakers to resume the loosening cycle … the CBE appears to have shifted back to supporting the currency,” James Swanston, MENA economist at the research firm, wrote.

The all-important carry trade: Despite the CBE having room to cut rates, the bank will want to maintain Egypt’s position as having one of the highest real interest rates in emerging markets, analyst Hani Abu El Fotouh suggests. Amid muted remittances and weak tourism, foreign inflows into government debt are currently Egypt’s largest source of hard currency, making the prospect of losing portfolio flows “much more” costly than any gains the economy would make from a rate cut, says Abu Bakr Imam, head of research at Sigma Capital. On the domestic front, real interest rates are well-balanced to help contain dollarization and alleviate the burden of debt servicing, El Swaify says.

This is particularly important when considering that the country’s banks have held a net foreign liability position since March, when foreign portfolio investors exited Egypt en masse, says Doss. “A larger scale rebound of foreign portfolio inflows would enhance interbank liquidity and result in cooling off T-bill yields from current levels.”