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Sunday, 14 August 2022

CBE to raise rates this Thursday to curb inflation

The Central Bank of Egypt (CBE) is likely to resume its tightening cycle and raise rates for the third time since March when it meets this Thursday in a bid to tamp down on inflation and support the EGP. Five of seven analysts and economists surveyed by Enterprise expect the Monetary Policy Committee (MPC) to raise rates, with four expecting rates to rise by at least 100 bps.

Where rates currently stand: The overnight deposit rate currently stands at 11.25%, and the lending rate is 12.25%, while the main operation and disc. rates are at 11.75%. The bank’s monetary policy committee (MPC) has hiked rates by 300 bps since March, but chose to leave them unchanged during its latest meeting in June, after inflation in May came in below expectations.

Rising inflation will be the main driver: Inflation reached a fresh three-year high in July on the back of higher food and fuel prices, with consumer prices in urban areas rising 13.6% y-o-y. “We see the MPC hiking rates by 100 bps as a proactive measure to curb inflation, which we expect will continue to rise over the course of the year driven by rising fuel and food prices, as well as the weakening EGP,” CI Capital’s Monsef Morsy said.

We haven’t reached the peak: “In our view, inflation has not yet peaked, and real underlying inflationary pressures remain high,” economist Mona Bedair added. Morsy expects inflation to continue rising to reach above 15% before the end of the year, while Capital Economics sees it peaking at 18% by 4Q.

Most expect a moderate hike to avoid ripple effects in the economy: CI Capital’s Morsy, economist Mona Bedair, and banking expert Hany Aboul Fotouh are penciling in a 100 bps rate hike this week. “The CBE could choose to raise rates by up to 100 bps at most in order to avoid the negative impacts of heightened rates on economic activity and spending,” Morsy said. Capital Economics is expecting the CBE to raise rates by 50 bps, and has penciled in a further 100 bps of hikes by year-end — a more hawkish scenario than the consensus expects.

But some think the CBE will take a more aggressive stance: “We deem a 200 bps interest rate hike coupled with c. 9% currency devaluation to EGP 21.2/USD necessary to support the currency and combat dollarization in light of sharp drops in the country’s foreign currency buffers,” Monette Doss, chief economist at HC Securities, told Enterprise.

What dollarization? External pressures triggered by the war in Ukraine and rising interest rates in developed markets have squeezed foreign-currency liquidity in the banking system and caused the country’s FX reserves to fall 20% since March. Surging commodity prices have added bns of USD to the country’s import bill and volatility in the financial markets has seen USD 20 bn in portfolio flows exit the country this year, putting pressure on the EGP which has slipped almost 22% since March. The EGP was trading hands at 19.17 against the greenback last week, edging closer to the record low of 19.54 set in December 2016.

Could 18% CDs make a comeback? Doss sees a possibility of the state reintroducing high-interest rate certificates of deposits (CDs) through state-owned banks. State-owned National Bank of Egypt (NBE) and Banque Misr attracted EGP 750 bn in deposits from Egyptian savers when they launched the 18% CDs following the devaluation in March.

A small minority sees the CBE biding its time: “We believe it is still early for a resumption in policy rate hikes, as the path of the EGP movement remains uncertain, given the maintained pressures on Egypt’s balance of payments,” Beltone’s Alia Mamdouh wrote in a note, adding that she expects the CBE to hold rates steady. She adds that inflation has been relatively “contained” within the same range over the past few months, giving the MPC some time to “better assess” the inflation path following the depreciation of the EGP. Al Ahly Pharos also sees the CBE keeping rates steady.

REMEMBER- The central bank is currently targeting 7% (±2%) inflation by the end of 2022, but has said it will “temporarily tolerate” the elevated annual headline inflation rate relative to its target until 2023.

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