The Central Bank of Egypt’s Monetary Policy Committee (MPC) left interest rates on hold for a seventh consecutive meeting on Thursday. Overnight deposit and lending rates were left 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) following the meeting.

All 10 analysts we surveyed before the meeting saw this coming: The analysts expected the CBE to maintain its cautious approach and hold rates as it monitors the uptick in 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.

The message on inflation: Keep calm. Annual headline inflation is well within the committee’s inflation target of 7%( ±2%) on average by 4Q2022, and is consistent with price stability over the medium term. International food and commodity prices remain at multi-year highs, the CBE noted. Rising food and energy prices pushed annual urban inflation to its highest level since November in August, rising slightly to 5.7% from 5.4% in July.

Global inflation putting CBE on guard? 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 rate cut, said Prime Holding’s Mona Bedeir.

More importantly: The CBE wants to keep rates high ahead of possible US tapering. The US Federal Reserve is widely expected to start reducing its covid monetary stimulus later this year in a move that will push up US rates and potentially put pressure on the EGP carry trade. Finance Minister Mohamed Maait took to Bloomberg earlier this month to reassure investors about the impact of rising rates on Egypt’s borrowing costs, emphasizing Egypt’s experience facing capital market volatility and the ministry’s preparedness for outflows.

The rate hold leaves us with one of the highest real rates in the world: Egypt’s real interest rate is the highest among more than 50 economies tracked by Bloomberg, the business news information service said last week. This will provide a buffer against rising US rates, S&P Global Ratings said in a recent report. “Compared with some other emerging markets, we think Egypt may fare somewhat better in the event of US interest rate hikes, mainly due to high real interest rates,” the ratings agency wrote.

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 sell-off from emerging-markets triggered by the pandemic last year, during which holdings of EGP bonds fell.

“We believe Egyptian treasuries will remain attractive, underpinned by EGP stability and maintained real interest rates given the low inflation,” Beltone wrote in a note following the meeting. “Among emerging markets with comparable yields, Egypt still stands out with a relatively less impacted economy from the repercussions of the covid-19 pandemic as it provides growth potential.”

Covid-19 may still present headwinds: Though the CBE noted that global economic activity was continuing to bounce back from the effects of the pandemic and monetary policy remained largely accommodative the world over, it warned that “prospects of global economic recovery remain contingent on the efficacy of vaccines and the ability of countries to contain the spread of the virus.”

The MPC remains optimistic saying that “leading indicators point towards a sustained strong pick-up across most sectors,” reflected in the GDP growth of 7.7% in 2Q2021 rebounding from last year’s -1.7%.

Looking ahead: Inflation is likely to fall below the CBE’s target range by the end of the year, and to remain subdued going forward, prompting further easing to an overnight deposit rate of 6.75% by the end of 2022, Capital Economics’ James Swanson wrote in a research note. Prime Holding’s Bedeir and Arqaam Capital’s Noaman Khalid also see the central bank holding rates till at least the beginning of 2022.

The Central Bank’s Monetary Policy Committee is set to next meet on 28 October, and will meet once more on 16 December before the year is out.