The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to leave rates unchanged for a third consecutive time during its meeting on Thursday, accounting for the possibility of a further uptick of global commodity prices, the bank said in a statement (pdf). Overnight deposit and lending rates remain unchanged at 8.25% and 9.25% respectively, while main operation and discount rates remain at 8.75%.

The hold was expected by all 12 analysts we surveyed ahead of the meeting. They cited the possible impact of heightened commodity prices on domestic inflation and the potential for rising bond yields in the US to hit our all-important carry trade.

Holding rates is consistent with achieving the target inflation rate of 7% +/-2 by the end of next year, the CBE said in its statement. The country’s “leading indicators are gradually recovering to their pre-pandemic levels,” while “global economic and financial conditions are expected to remain accommodative and supportive of economic activity over the medium term,” despite a recent pickup in global bond yields.

The new highs recorded in global food and commodity prices including oil were a main driver of the CBE’s decision, EFG Hermes’ Head of Macro Mohamed Abu Basha and Beltone's head of research Alia Mamdouh told us, with the CBE expecting a possible pick up in the rate of inflation in the coming months. Annual urban inflation accelerated to 4.5% in February after a drop to 4.3% in January.

The seasonal increase in food prices accompanying Ramadan is likely to drive up inflation, Pharos’ head of research Radwa El Swaify told us. Over the second and third quarters of 2021, inflation will fluctuate between 5% and 7% on an annual basis, driven mainly by the base effect, she said. As for the full year, EFG Hermes’ Abu Basha forecasts inflation to average 6% amid expected increases in food and commodity prices, while Beltone’s Mamdouh sees inflation at an average of 7%, though it may cross this level if there is unexpected seasonality in prices or spending, he said.

But price growth could remain weaker until the end of the summer: Egypt is unlikely to see severe inflationary pressures due to increasing stockpiles of commodities to meet demand for eight months, said Mamdouh. Egypt said in January it had enough strategic wheat reserves for the next five months, sugar for the next eight months, and oil for the next four. This could change after the summer when the government has built up its stockpiles of key commodities, she said.

The carry trade remains attractive: Egypt’s real rates are still the highest in the world — and the country is in a better position to weather possible outflows than countries like Brazil and Turkey due to its positive growth rate in 2020, Abu Basha said, adding that Egypt has not witnessed outflows in the first two months of the year due to offering high real yields. Foreign holdings in local Egyptian debt hit its highest-ever level of USD 28.5 bn in February, reversing the 60% capital outflows prompted by covid-19 between March and May last year, Bloomberg notes.

Still, Egypt remains vulnerable to rising US treasury yields which threaten to tempt foreign investors away from emerging markets, El Swaify told us. Emerging-market bond funds saw their biggest outflows in almost a year earlier this month as investors lost their appetite for risk amid rising rates in the US while EM currencies are down 1% since February. “While portfolio flows and the pound have remained broadly stable in recent weeks, we believe Egypt is not immune to these developments,” said Goldman Sachs economist Farouk Soussa ahead of the meeting.

This is despite a raft of rate hikes in emerging markets last week: Russia, Brazil and Turkey all took action and hiked rates last week in what some are predicting to be the start of a tightening cycle to ward off stimulus-fueled inflation. Russia’s central bank unexpectedly increased rates for the first time since 2018 as inflation inches towards new five-year highs while Brazil went ahead with its first rate-hike in six years, raising them by 75 bps, higher than the 50 bps expected by economists.

And a reversal of the easing cycle could be in the cards if current trends accelerate: The CBE is in “wait-and-see” mode, but may raise interest rates if US treasury yields and commodity prices continue to rise at a rapid pace, according to Abu Basha. Meanwhile, Beltone’s Mamdouh notes that any higher rates are subject to global economic developments. Since 2018 the central bank has reduced its benchmark interest rate from 18.75%. It cut rates by a total of 400 bps last year, including an emergency 300-bps cut in March and two 50-bps cuts in September and November to support the economy through the pandemic.

SPEAKING OF TURKEY: President Recep Tayyip Erdogan sacked his third central bank governor since mid-2019. The move came two days after the central bank hiked rates a sharp 875 bps to 19% in a bid to stave off inflation. The new governor is a former MP from Erdogan’s AK Party who has publicly backed the president’s demand for lower rates. Reuters has more.