ENTERPRISE POLL- The CBE is expected to leave rates on hold: Rising commodity prices and higher US yields will likely prompt the Central Bank of Egypt (CBE) to leave interest rates on hold at its next meeting,, according to an Enterprise poll. All 14 analysts and economists we surveyed expect the central bank to continue its cautious approach and hold off on making further cuts until the second half of the year, particularly as a number of emerging market central banks hiked rates last month.

Where rates currently stand: The CBE’s overnight deposit rate stands 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.

The two key factors: commodity prices and rising interest rates: “We’re looking for rates to remain on hold as the situation that existed in the last meeting prevails, namely elevated rates globally and high commodity prices,” EFG Hermes’ Mohamed Abu Basha told us.

Inflationary pressures have so far remained muted: Inflation has risen only slightly during the first quarter despite a backdrop of rising global commodity prices. The annual urban rate has increased from 4.3% in January to reaching 4.5% in March. This figure is still short of the central bank’s 7% (± 2%) target range.

But this will likely change in the months ahead: “Inflation will gain momentum in the next couple of months as the impact of rising global commodity prices trickles down to the general economy,” Beltone’s head of research Alia Mamdouh told us. The restocking of essential food items amid the global increase in raw material prices will likely cause increased upward price pressure on foodstuffs — and will inform the CBE’s decision to leave rates unchanged, said CI Capital’s Sara Saada. Meanwhile, Sigma Capital head of research Abou Bakr Imam says the central bank will not make any policy changes until it assesses the impact of the increased public sector wages due to come in in July, which he expects will cause inflation to accelerate.

The base effect could mitigate this: Naeem Brokerage’s Allen Sandeep notes that a favorable base effect could keep price growth in check. “While we do expect a pick-up in monthly inflation going forward, the favorable base year factor should absorb most of it even considering the possibility of a fuel price hike in July,” he said.

Higher US treasury yields could still tempt foreign investors Westwards: Rising commodity prices and cheaper US treasuries (as a result of higher yields) “will trigger the CBE to maintain a high real interest rate environment in order to maintain portfolio attractiveness, which is key to the stability of the EGP given the slow recovery in the tourism sector,” said Mamdouh.

Recent rate hikes by EM central banks could add a bit of pressure to leave things unchanged in Egypt: “We’ve seen some emerging markets start to hike rates. In that respect, we think the CBE will continue with its stance of holding rates steady,” Abu Basha said. Policymakers across 37 EMs delivered five net interest rate hikes last month, signaling a switch in direction from monetary easing for the first time since February 2019, we noted last week.

The CBE has nurtured Egypt’s position as one of the world’s most lucrative carry trades in the face of rising US yields. Any rate cuts at this point could dim the attractiveness of sovereign debt to foreigners, says independent analyst Hany Aboul Fotouh. As pressure on sources of foreign currency remains “significant” and as the economy still faces “pandemic-related distortions” and structural weaknesses, the central bank will likely champion the role of foreign portfolio investment to finance the nation’s current account deficit, Prime Holding’s Mona Bedeir said. But with the prevalence of “global volatility and weak prospects of foreign portfolio flow momentum,” the CBE is unlikely to cut rates at the moment, said CI Capital’s Saada. Emerging markets last month saw daily outflows for the first time since October as the uptick in US treasury yields this year dented the EM asset rally and raised the spectre of a repeat of 2013’s so-called Taper Tantrum.

How good is Egypt’s carry trade? HC Securities’ Monette Doss, who sees the MPC leaving rates unchanged, benchmarks us against Turkey, which she estimates has a real yield of c. 4% on 19-month treasuries. “This compares to a real yield of 3.9% on Egypt’s 12M T-bills,” she says, “given a 15% tax rate for US and European investors and our inflation forecast of 7.5% over the next 12 months.”

For now, the CBE will continue to rely on subsidized lending to boost activity in certain sectors, Suez Canal Bank’s Mohamed Abdel Aal said. Many companies in Egypt currently have access to loans at sub-market rates backed by the CBE, under initiatives that were introduced in recent years and expanded when the covid-19 pandemic took hold — including EGP 200 bn in loans to factories and EGP 50 bn in support to the hard-hit tourism sector.

So, when can we expect the next rate cut? Not until the late summer/early fall is the loose consensus. The CBE will likely continue holding rates at least until August, with the first cut likely to take place after Egypt makes it back onto JPMorgan’s emerging-markets government bond index, Arqaam Capital’s Noaman Khalid says. Reinclusion on the index could attract up to USD 4.8 bn of passive inflows into Egyptian bonds and a potential 5% appreciation of the EGP against the greenback, Rand Merchant Bank economist Neville Mandimika recently said.

Towards the end of the year seems the most likely window for cuts, say Beltone’s Mamdouh and Pharos Holding’s Radwa El Swaify, who sees “more reasons for CBE to make no interest rate cuts and keep any potential cuts to later this year.” But there is a slim chance that the rate cut might be brought slightly forward if growth remains muted. “If the economic recovery remains slow-going, policymakers may opt to loosen monetary conditions sooner,” Capital Economics’ Jason Tuvey wrote in a research note.