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Sunday, 25 September 2022

CBE (kind of) bucks the global tightening trend by leaving rates unchanged

CBE reaches for another tool in the toolbox: The Central Bank of Egypt (CBE) left interest rates unchanged on Thursday, a move that went against market expectations. The Monetary Policy Committee (MPC) left the deposit rate at 11.25%, the lending rate at 12.25%, and the main operation and disc. rates at 11.75%, it said in a statement (pdf) following its policy meeting. Almost all analysts surveyed by Enterprise ahead of the meeting expected the central bank to hike rates in a bid to curb rising inflation and the weakening EGP, with most forecasting a 100-bps increase. This is the third consecutive time that the CBE has held rates steady, and the second meeting with Hassan Abdalla at the helm.

Tightening by other means: The central bank bumped up its reserve requirement for all banks to 18% from 14% currently, which it said would “complement the tightening stance that the CBE is maintaining.” The reserve ratio regulates how much capital commercial banks are required to hold in their reserves. By raising the ratio, the central bank is aiming to restrict lending, tighten financial conditions, and support the currency — all without raising the cost of borrowing for the government or the private sector.

What they said: “The MPC concurs that the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term,” the CBE said. The central bank reiterated that it will “temporarily tolerate” inflation above its target of 7% (±2%) on average in 4Q 2022 as it continues to assess the impact of the 300 bps worth of hikes made earlier this year, and again stressed that price hikes are the result of external supply-side pressures resulting from the war in Ukraine. Inflation increased to 14.6% in August, its highest level in more than 3.5 years on rising food prices.

Why not raise rates? Hiking interest rates is unlikely to bring foreign investors back into the carry trade amid rising US rates and uncertainty about the EGP, nor would it do much against the impact of imported inflation. Another rate hike would have also raised the government’s borrowing costs and put more pressure on the budget, said Pharos' Esraa Ahmed, who was the only analyst in our poll to forecast a hold. “The central bank chose the most appropriate solution to contain inflation during this stage and manage liquidity instead of directly raising the cost of borrowing, which would have raised the cost to the state budget significantly,” she said.

But pressure for action could be greater in the next meeting, according to economist Mona Bedeir, who before the meeting predicted a 100-bps hike. Leaving rates on hold “will translate to more pressure on exchange rates and higher monetary tightening expectations in the coming meetings,” she told Bloomberg Asharq (watch, runtime: 00:40).

A win for Team Deval in November? BNP Paribas expects the central bank to hike rates by 100 bps at its next meeting in November alongside a devaluation of the currency ahead of an agreement with the IMF. “We think the next rate hike is likely to be deployed in tandem with a surprise devaluation of at least 10%, which would help achieve convergence with the parallel market rate,” BNP Paribas MENA economist Mohamed Abdelmeguid wrote in a note last week.

The bank expects the EGP to fall to 22-23 against the greenback by the end of the year and the central bank to raise rates by another 200 bps by its December meeting.

So far, so gradual: The EGP has been on a slow decline in recent weeks, falling almost 2% since Hassan Abdalla was appointed to head up the central bank in mid-August. The currency has fallen nearly 24% since the devaluation in March to stand at around EGP 19.52 as of this morning.

New inflation targets ahead? The central bank will announce new inflation targets soon, a CBE source told CNBC Arabia. The central bank is currently targeting a 7% (±2%) rate of inflation, far below the 14.6% urban rate in August.

While the CBE held steady, central bankers everywhere pushed forward with tightening: Analysts were expecting the CBE to follow through with a rate hike in response to the Federal Reserve’s third successive jumbo-sized 75 bps rate hike last Wednesday, which the Fed signalled was a bid to tame inflation and external growth risks. A number of major central banks hiked rates last week following the Fed decision, including those of Switzerland and the UK.

The story got attention in the foreign press: Reuters | Bloomberg.

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