The Central Bank of Egypt (CBE) will likely raise interest rates for the second time since March when it meets next week as inflation continues to accelerate and rising global rates put pressure on portfolio flows. Six of the seven analysts we surveyed this week expect rates to increase next Thursday, 19 May, with five of them seeing the central bank hiking rates by up to 200 bps.

The analysts spoke after inflation figures released yesterday showed prices advanced at their fastest rate in nearly three years (see separate story, below).

REMEMBER- The CBE raised rates by 100 bps and devalued the EGP in a surprise meeting in March in response to the declining conditions. The overnight deposit rate currently stands at 9.25%, and the lending rate is 10.25%, while the main operation and disc. rates are at 9.75%.

Inflation + tight financial conditions will be the drivers: Al Ahly Pharos expects the central bank to raise rates by 200 bps, economist Esraa Ahmed said yesterday. “Inflation rates place persistent pressure on real interest rates keeping them in negative territory. The accelerated tightened monetary conditions globally and the lingering implications of the Russian war on Ukraine have a negative impact on emerging markets and drive capital outflows,” she wrote in a note.

An aggressive stance: This would be the central bank’s most aggressive tightening since mid-2017 when it moved to curb inflation following the EGP float.

Fresh inflation figures have changed some analysts’ calculations: Renaissance Capital has penciled in a 100-bps hike but following yesterday’s inflation data has flagged that there is “significant upside risk” to that forecast, said Yvonne Mhango, who heads Africa research at the investment bank. Annual urban inflation rose to another near three-year high in April, reaching 13.1% as consumer prices responded to the EGP devaluation and soaring global food prices.

“The inflation figure came above our expectation and we see inflation deviating further from the CBE's target, which calls for stronger monetary policy action,” CI Capital’s Sara Saada told Enterprise. CI Capital now expects a hike of at least 150-200 bps.

Rate hikes are currently the only short-term direct solution to maintain policy credibility while managing inflation and EGP-USD expectations, Arqaam Capital’s Noaman Khalid said. “It is important for the CBE to act as early as possible, especially with the ongoing rise in the USD against EGP in the parallel market,” he said, forecasting a 150-200 bps hike. The EGP has slipped 18% against the greenback since the devaluation in March.

Central banks are tightening the world over — and the US is setting the pace: The US Federal Reserve delivered a 50 bps rate hike — its biggest in over two decades — at its meeting last week, a move that is piling pressure on emerging-market assets and tightening financial conditions. With US inflation peaking at a four decade high, further hikes are expected. Many countries either already have or are expected to follow suit, as they look to curb inflation and maintain their fundamentals in the face of a strengthening USD.

The Fed hike + a global risk-off has dented investors’ appetite for Egyptian bonds, which until recently had offered one of the highest inflation-adjusted interest rates in the world. Rising inflation at home has turned the country’s real rates negative at the same time as US yields have hit 3.5 year-highs and economic uncertainty has provoked a sell-off in emerging-market assets.

What’s it going to take to attract inflows? BNP Paribas’ Mohamed Abdelmeguid — who expects a 200-bps hike next week — said in a note this week that policymakers will need to raise rates by another 300-400 bps before foreign investors return to EGP-denominated debt.

Higher yields may not cut it: “Real rates won’t matter that much at this stage,” EFG Hermes’ Mohamed Abu Basha told Bloomberg. “The global environment — whether the war in Ukraine or a very hawkish Fed — are likely to dent the prospects of any notable pick-up in carry trade inflows anyways.”

But 18% CDs continue to boost real deposit rates: For holders of the one-year 18% certificates of deposit offered since March by the National Bank of Egypt and Banque Misr, the real rate of return stands at 4.9%, which is likely to be the highest globally, Naeem Brokerage’s Allen Sandeep said yesterday. Investors have poured more than EGP 630 bn in the CDs so far.