The Central Bank of Egypt will likely raise interest rates for the first time in 16 months when it meets this Thursday, a move that the majority of analysts and economists we polled see as significant to curb inflation that has been pushed to a three-year high by the war in Ukraine. Six of the nine analysts we surveyed expect the central bank to hike rates, with some of them calling for a modest 50 bps increase and others predicting a more aggressive tightening of 150 bps.

The central bank has left interest rates steady for over a year, leaving the overnight deposit rate at 8.25% since making a 50 bps cut in November 2020. The lending rate has remained at 9.25% while the main operation and discount rates are both at 8.75%.

Rising inflation could prompt the CBE to act now: The inflation rate jumped to its highest level in 31 months in February, driven by accelerating domestic food prices which hit levels not seen since 2018. The annual inflation rate in Egyptian cities recorded 8.8% last month, compared to 7.3% in January — its highest level since July 2019, while core inflation rate accelerated at its quickest pace since May 2019. The CBE targets a 7% (±2%) inflation rate.

The commodities price shock has changed the game: “The acceleration of geopolitical tensions in Eastern Europe, with the chaotic reaction [in] commodity prices [globally], is standing in the way of the CBE’s inflation target, which is facing various pressures, most of which are out of its control,” Prime Holding’s Mona Bedeir told us. “The bank may be looking to tighten its policy sooner than we expected. We raise our inflation expectations to 9% in 2022, from 8.3%, and therefore we expect the bank to raise interest rates by at least 200-300 bps in 2022, the first of which will be in the March meeting by 50 bps,” she said.

“The CBE may prefer to raise interest rates at its next meeting by up to 150 bps as a proactive step to curb inflationary pressures and a response to tighter monetary policies globally,” Esraa Ahmed, economist at Al Ahly Pharos, said. EFG Hermes’ Mohamed Abu Basha is calling a 100 bps bump this week, while Mubasher International’s head of research Hisham El Shebeini thinks policymakers will go for a 50-100 bps increase.

Egypt’s real interest rate is now negative: Until recently, Egypt boasted one of the highest inflation-adjusted interest rates in the world, an advantage that helped it attract bns of USD in portfolio flows into the local bond market. Eroded by heightened inflation, Egypt’s real rate has fallen to -0.55%. Pointing to the importance of the carry trade to Egypt’s foreign reserves in a time of international turmoil, Monette Doss, chief economist at HC Securities, forecast a 50-75 bps hike.

Whatever happens this week, expect rates to end 2022 higher: Beltone Financial’s chief economist, Alia Mamdouh, thinks the central bank will hold rates during this week’s meeting but is predicting a 100 bps hike before the end of the year. Meanwhile, James Swanston, MENA economist at Capital Economics, predicts a 50 bps hike on Thursday and a further 200 bps of hikes by the end of 2023.

Some expect the central bank to sit tight: “The rush to tighten policy may be unjustified at present," banking expert Mohamed Abdel Aal (a former member of the board of Suez Canal Bank) told us. He ruled out a rate hike this month, telling us that policymakers won’t act while inflation remains within the CBE’s target range. Hany Aboul Fotouh, a former banker turned consultant, also forecast rates to remain unchanged, telling us that the central bank will likely hold fire while the situation in Ukraine and the global markets remains uncertain. He also downplayed the effect of higher US rates on the EGP carry trade, saying that the slender increase shouldn’t stoke a move out of EGP-denominated debt.

Inflation will continue to increase in the coming months as the war continues to disrupt the global food supply and oil prices remain elevated. HC Securities’ Doss is now forecasting inflation to average 11.5% this year while Prime’s Mona Bedeir sees the rate averaging 9% through to the end of the year.

Global financial conditions are tightening: The Federal Reserve joined the tens of other central banks to raise interest rates last week, kicking off its tightening cycle with a 25-bps hike and signaling that similar increases would take place at each of its six remaining meetings this year. The Bank of England also raised its interest rate by another 25 bps on Thursday.