ENTERPRISE POLL- The Central Bank of Egypt will likely leave interest rates unchanged at its meeting this Thursday as it looks to keep inflation in check, according to a poll conducted by Enterprise. All 10 analysts surveyed said they expected the CBE to maintain its cautious approach for its seventh consecutive meeting and hold rates as it monitors the uptick in local and global inflation — as well as the effect of possible US tapering on the appeal of Egyptian debt to global investors who have been a key source of foreign currency.

Where rates currently stand: The overnight deposit rate is at 8.25%, the lending rate at 9.25% and 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. It has since maintained rates for six consecutive meetings, including its most recent in August, amid concerns about an increase in inflation

Higher inflation here at home means the CBE can afford to delay a cut: Egypt recorded its highest rate of headline inflation since November, with the rate rising to 5.7% in August from 5.4% in July. The overall rate in both urban and rural areas rose to 6.4% in August from 6.1% a month earlier.

And the global uptick in commodity prices is keeping policymakers cautious: Global food prices resumed their climb in August after witnessing a retreat in June and July, while factory closures and supply chain issues off the back of the delta variant have driven up commodity prices, putting the CBE on guard over stimulating inflation through a policy cut, said Prime Holding’s Mona Bedeir.

Inflation transitory? Speaking to Bloomberg last week, Finance Minister Mohamed Maait said he expected the pickup in inflation to be “transitory.” “I’m expecting inflation to start coming down and things will move to normal,” he said, attributing the recent upward trend to the global markets.

Foreign investors continue to buy Egyptian debt, attracted by some of the highest effective interest rates in the world, a fact that has kept foreign inflows high and contributed to stability in the EGP : USD exchange rate. Foreign holdings of Egyptian domestic debt increased to a record USD 33 bn at the beginning of August as the country’s real interest rate kept yield-hungry investors buying into the local market. Inflows have surged by some USD 23 bn since the emerging-market sell-off triggered by the pandemic last year, during which holdings of EGP bonds slumped.

But US tapering is still a downside risk: The tapering of US Federal Reserve’s bond buying program — expected as early as the end of this year — could weigh on emerging markets, said Pharos’ Esraa Ahmed, who sees a case for a hold by the CBE at this meeting and “in the near future.” The CBE will likely leave rates on hold to maintain the attractiveness to investors of Egyptian debt in the face of a possible hike in US interest rates soon after, independent analyst Hany Aboul Fotouh tells us. HC Securities’ Monette Doss says the Fed’s repeated assurances that US interest rate hikes are unlikely in the imminent future has relieved pressure on EM treasuries and maintained the appeal of the carry trade — for now.

A cooling of the US economy could work in our favor: The Fed may delay hiking interest rates after payroll figures showed that only a third of the expected number of new jobs were added to the economy in August, indicating that the rate of recovery is slowing, said head of research at Mubasher Trade Hesham El Shebeini.

Also helping matters: an expected growth in tourism receipts: “A rebound in foreign currency receipts from tourism following the resumption of Russian flights to Egypt's Red Sea resorts released some interest rate pressure on the EGP,” said HC Securities’ Monette Doss.

Interest rates could be kept on ice through the end of the year: The CBE is likely to leave interest rates untouched until the end of 2021, said Bedeir, citing a need to maintain stable inflation within the CBE’s target range. Meanwhile, Arqaam Capital analyst Noaman Khalid has revised his expectation for a rate cut from the end of 2021 to the beginning of 2022 due to inflation and the global spread of the delta variant.

And what happens in other EMs could reverberate here at home: Returns on Egyptian debt in relation to other EMs will also influence the CBE’s decision. A number of emerging market central banks have already moved to tighten monetary policy in recent months, with Russia hiking its interest rates by 100 basis points in July — its biggest jump since 2014 — in a bid to curb rising inflation. Central banks in Latin America, South Korea, and in emerging Europe are likely to follow suit, Bedeir said.