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Sunday, 8 August 2021

CBE leaves interest rates on hold for sixth consecutive meeting

The Central Bank of Egypt’s Monetary Policy Committee (MPC) left interest rates unchanged for a sixth consecutive meeting on Thursday as policymakers look to preempt rising inflation and maintain Egypt’s high real interest rate. Overnight deposit and lending rates were kept unchanged at 8.25% and 9.25%, respectively, while the main operation and discount rates remained at 8.75%, the central bank said in a statement (pdf) after the meeting.

The hold was forecast by all 12 analysts and economists we surveyed before the meeting, who said that the central bank would leave rates unchanged to keep inflationary pressure in check amid rising global commodity prices. It will also ensure Egypt’s carry trade remains one of the most attractive in the world, helping bolster our stock of foreign currency.

The decision is “consistent with” its inflation target of 7% (±2%) on average by 4Q2022 and stability of local prices in the medium term, the statement added.

Egypt’s economy is still supported by “the positive contributions of trade, construction, and communications, as well as natural gas extractions,” with leading indicators showing “a sustained improvement across most sectors,” the central bank said. Meanwhile, global economic conditions are likely to continue to be “accommodative and supportive of economic activity over the medium term,” yet this is subject to “the efficacy of vaccines and the ability of countries to contain the spread of the virus, in light of the emergence of newer variants.”

Local prices have been muted so far despite a surge in global commodity prices: Annual headline inflation rose only slightly to 4.9% in June from 4.8% the previous month due to an unfavorable base effect and an uptick in domestic food prices. The headline rate has remained below the lower bound of the CBE’s target rate throughout 2021, rising only 60 bps since January.

But inflationary pressures are on the horizon: The summer will see a rise in inflation, which Pharos’ head of research Radwa El Swaify believes will average 5.5-6.5% in July and August. Price growth will likely be driven by higher electricity and cigarette prices which came in on 1 July, as well as the higher costs of fuel, she tells us. Higher global commodity prices are also likely to put its toll on local inflation, she adds.

Then there’s the base effect: “Annual inflation readings are expected to continue to be affected by unfavorable base effects in the near term,” the central bank said. Inflation came in at 4.2% in July 2020 and 3.4% in August.

Egypt has one of the highest real interest rates in the world, which has helped the country to see a rebound in portfolio flows since May 2020. Foreign holdings hit a record high in February less than a year after investors trimmed their holdings of Egyptian bonds during a covid-inspired sell-off from global emerging markets.

Many other emerging markets are aggressively tightening in response to rising inflation: Russia, Mexico and Chile have all raised interest rates, while on Thursday Brazil went ahead with a 100-bps rate hike, its biggest since 2003.

This shouldn’t affect Egypt just yet: Egypt is still offering attractive value due to its low risk and high return compared to other emerging markets, especially Brazil, El Swaify says.

Foreign holdings steady: Foreign investment in Egyptian government debt currently stands at USD 28 bn, Finance Minister Mohamed Maait told Al Arabiya in a televised interview on Thursday. This is little changed from May, when the minister said total holdings amounted to USD 28-29 bn, and February when inflows hit a record USD 28.5 bn.

And the gov’t is predicting more inflows later this year: The government is expecting USD 3-4 bn in additional foreign inflows during the second half of 2021. JPMorgan is expected to re-include Egypt in its emerging-market sovereign bond index later this year, while Euroclear could begin clearing EGP-denominated debt, making it easier for foreign investors to enter the local debt market.

Looking forward: Analysts are divided on whether the CBE will deliver cuts this year, with Arqaam Capital analyst Noaman Khalid seeing a “window for a rate cut toward the end of the year as tourism kicks off strongly offering a key alternative to current debt inflows. However, Prime Holdings’ Mona Bedeir and Renaissance Capital expect the CBE to pause making further cuts for the rest of the year. For 2022, most market watchers widely expect the CBE to resume its easing cycle if inflation remains below the CBE’s target range.

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