ENTERPRISE POLL- CBE to leave interest rates on hold this Thursday: Rising global commodity prices and a pick-up in US treasury yields will likely mean that the Central Bank of Egypt (CBE) will leave interest rates unchanged when its Monetary Policy Committee meets this Thursday, according to an Enterprise poll. All 12 analysts and economists surveyed last week expect the central bank to play it safe and leave rates on hold ahead of a possible pickup in inflation and renewed volatility in emerging-market flows.

Where rates stand currently: The CBE’s overnight deposit rate is at 8.25% and the lending rate is 9.25%, while the main operation and discount rates are at 8.75%. The central bank slashed rates by 400 bps last year, including an emergency 300-bps cut in March to protect the economy from the fallout from covid-19, and two 50-bps cuts in September and November.

What’s weighing on policymakers right now?

#1- The commodities boom: There are concerns that Egypt’s status as a net importer (particularly of key commodities such as wheat and oil) means that the recent surge in global commodity prices — particularly in metals, energy and food — could stimulate a pickup in domestic inflation. So far, headline annual inflation has remained muted despite the year-long rally that has taken place globally. Price growth ticked up only marginally in February, reaching 4.5% from 4.3% in January — still short of the lower bound of the central bank’s 7% (± 2%) target range. And local food prices have remained untouched by what has been happening in the global markets, which last month saw prices rise to the highest level in almost seven years.

It’s not just global forces threatening to push up inflation: Seasonal factors including Ramadan and the beginning of the next school semester could put upward pressure on prices in the weeks ahead, said Mona Bedeir, chief economist at Prime Holding.

Analysts are expecting only a moderate increase in the months ahead: Analysts so far don’t foresee inflation overshooting the central bank’s target range. Renaissance Capital’s Yvonne Mhango sees inflation stabilizing at 5%, Arqaam Capital’s Noaman Kalid thinks inflation will average 6-7% through 2021, EFG Hermes’ Mohamed Abu Basha is forecasting 6%, while Pharos’ Radwa El Swaify is penciling in a sustained rise in the headline rate averaging 7% until the fourth quarter, when it might begin to back off.

Even so, the CBE will likely tread carefully: “With the stability of food commodity prices on a monthly basis after the decline that they witnessed during the past two months, which coincided with a significant increase in international commodity prices as well as the increase in oil prices, we expect the central bank to maintain interest rates,” said Beltone Financial’s Alia Mamdouh.

#2- The uptick in US treasury yields this year has dented the rally in emerging markets, which in January lifted EM stocks to record highs. EMs saw daily outflows for the first time since October earlier this month as investors dumped risk assets and commentators raised the spectre of a repeat of 2013’s so-called Taper Tantrum.

This is going to play into the central bank’s thinking when it meets this week: “While inflation figures support a 25-50 bps rate cut, the rise in US treasury yields and the risk for EM portfolio exits will prompt the MPC to keep rates unchanged,” said Pharos’ El Swaify.

Egypt has been reliant on foreign portfolio inflows for hard currency after the collapse of tourism revenues at the hands of the pandemic and low export volumes, HC Securities Monette Doss told us. “With treasury yield hikes in the USA as well as different emerging markets such as Turkey, we believe that the CBE has limited room to undertake further interest rate cuts in its upcoming meeting,” she said.

The Egypt carry trade remains competitive: Real yields on EGP-denominated one-year bills currently stand at 5.1%, more than 300-bps higher than the return offered by EM competitor Turkey, Doss said.

The central bank will likely remain cautious in the coming months: “The recent acceleration in global commodity prices, especially oil and food prices, in addition to seasonal factors, leads us to believe that the easing cycle is nearing its end and no further reduction is expected before the second half of 2021,” Bedeir told us.