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Sunday, 31 October 2021

Egypt leaves rates on hold as CBE eyes Fed taper, inflation,

The Central Bank of Egypt (CBE) left interest rates on hold for an eighth consecutive meeting on Thursday amid rising global inflation and expectations the US Federal Reserve will start tapering its stimulus program by the end of the year. The Monetary Policy Committee left overnight deposit and lending rates unchanged at 8.25% and 9.25%, respectively, while the main operation and discount rates are still at 8.75%, the central bank said in a statement (pdf) following the meeting. The CBE cited a slow-down in global economic activity due to supply chain disruptions, as well as expectations that international financial conditions will remain accommodative in the medium term as among the factors motivating the rate hold.

The decision comes as no surprise: All 12 economists and analysts we surveyed in our regular interest rate poll predicted the CBE would leave rates unchanged.

This means Egypt still offers one of the highest real interest rates in the world, which will be crucial in reducing volatility should US rates pick up or local inflation rise significantly in the coming months. “We believe Egyptian treasuries will remain attractive, underpinned by EGP stability and maintained real interest rates,” Beltone Financial’s Alia Mamdouh said in a research 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.”

Portfolio flows have been a crucial source of hard currency for Egypt as its economy recovers from the covid pandemic. Foreign holdings have surged to a record USD 33 bn this year, bolstering the country’s balance of payments amid a plunge in tourism revenues.

Taper time is approaching: Fed officials have said that the central bank could begin unwinding its USD 120 bn a month bond-buying programme in November — and has signalled it will then begin increasing interest rates. Rising US rates could spell challenges for emerging markets as investors are tempted to sell-down riskier assets in favor of higher-yielding US treasuries.

The FinMin has sought to project confidence ahead of the taper, with Finance Minister Mohamed Maait telling Bloomberg last month that policymakers are closely monitoring the situation — and talking up Egypt’s experience at handling EM volatility.

Inflation is also a concern for policymakers: Annual urban inflation reached a 20-month high in September of 6.6%, which the CBE attributed to an unfavourable base effect and accelerating food prices, which rose for the fifth consecutive month to 10.6%.

But the CBE isn’t sounding the alarm bells: The CBE said that its current policy will see prices stabilize in the medium term, and is consistent with achieving its inflation target of 7% (+/-2%) by 4Q2022.

Heightened inflation should be temporary, according to Capital Economics, which said that the urban rate will remain at its current level into early 2022 but could fall back below the lower bound of the central bank’s target range by the middle of next year.

No rate cuts in the near term: Analysts also don’t see much chance of the CBE resuming its easing cycle while global prices remain pressured. “Given the upside risk to inflation in the near term and the sizable CA deficit, we do not expect the central bank to relax its monetary policy stance in the short term,” Renaissance Capital wrote in a recent note. Arqaam Capital’s Noaman Khalid and Prime Holdings’ Mona Bedeir both see the central bank holding rates until at least the beginning of 2022. “Egypt’s structurally-high financing needs at a time of growing risk of tightening global conditions will keep the monetary authorities cautious,” Bedeir said in our pre-meeting poll. Capital Economics’ James Swanson also predicts the CBE won’t enact a rate cut before mid-2022, writing over the weekend that he expects policymakers to lower the overnight deposit rate by a total of 150 bps by the end of 2023.

When’s the next meeting? The Monetary Policy Committee is set to convene for its final meeting of the year on 16 December.

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