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Sunday, 29 January 2023

CBE to hike interest rates this week -poll

The Central Bank of Egypt (CBE) is likely to hike interest rates when it meets on Thursday as inflation continues to run high, according to our interest rate poll. Four of the seven analysts and economists we surveyed see the Monetary Policy Committee raising rates later this week. Those predicting a hike are evenly split: Two expect a 100-basis-point hike and two are calling for a 200-bps hike.

Looking ahead: Six of the seven experts we surveyed expect rates to rise a total of 100-250 bps over the course of 2023.

Where rates currently stand: The overnight deposit rate currently stands at 16.25% and overnight lending rate at 17.25%, while the main operation and disc. rates are at 16.75%. The CBE raised rates by 800 bps last year, including a higher-than-expected jumbo rate hike of 300 bps in December — its biggest rate hike since 2016, before floating the EGP. The move came to curb inflation, which hit a fresh five-year high of 21.3% last month. It also preceded the latest devaluation of the EGP, which is now trading at around 29.94 to the greenback after starting the year at 24.70.

The consensus is that inflation has not yet peaked. All six of the analysts we spoke to expect inflation to continue rising in the coming months and to remain elevated over the course of 2023. Economist Mona Bedeir expects inflation to peak in 1Q 2023 at 24.7% on average, while HC Securities banking and macro analyst Heba Monir is predicting prices to peak in July at 23.5% before retreating to 18.2% in December 2023. Prime Securities’ head of Research Amr El Alfy thinks inflation will remain “in the double digit range until it begins to decline during the last quarter of this year.” Price hikes will be driven by the EGP depreciation and its ongoing impact on imports, expected fuel price increases, seasonal factors including Ramadan, and a potential hike to household electricity bills at the end of the fiscal year in June, those we spoke to said.

Meaning the central bank is likely to keep tightening past February: The majority of the analysts we spoke to predicted further tightening this year beyond next week’s meeting, with most predicting hikes of 200 bps or more over the course of the year — including HC’s Monir, who was one of two analysts to predict that the MPC will leave rates on hold this week. “We have penciled in a further 250 bps of increases this year and the risks lie to the upside,” Capital Economics MENA economist James Swanston said, without making a prediction about the February meeting. Prime’s El Alfy sees the CBE going for two consecutive 100-bps increases in February and March in a bid to get a handle on inflation.


#1- The carry trade. Recent USD inflows into the local market following the latest devaluation show that the “carry trade is becoming more attractive to foreign investors,” said HC’s Monir. That said, the latest issued 12-month T-bills offer only a 0.57% real yield, she added, “solidifying our view of a needed increase in policy rates until the end of the year.” Al Ahly Pharos economist Esraa Ahmed agreed, saying that “inflationary pressures accompanied by the weakening FX and the commitment to an IMF-backed program will induce the government and the CBE to try to shrink the negative territory of real interest rates.”

#2- FX liquidity + the EGP / USD rate. Several of those we spoke with struck a positive tone on the stability of the EGP, noting that the inflows triggered by our IMF agreement (including from Gulf investors), the latest devaluation, and the introduction of 25% certificates of deposit are working to ease a shortage of hard currency. But much can still happen: “Potential movements [in interest rates] are highly related to the USD liquidity availability in the coming period as a response to the recent EGP depreciation,” Al Ahly Pharos’ Ahmed told us. Bedeir said that “given the scale of FX backlogs and pent-up demand for the USD, it is necessary to respond proactively and firmly to the pressures on USD-EGP rate.”

#3- How the Fed moves. “Despite the recent recovery in global risk aversion, Egypt's monetary policy remains contingent on the [US Federal Reserve’s] policy cycle and the global risk environment,” said Bedeir. “Clarity from the Fed on its approach, as well as the impact on the USD and global liquidity conditions, will be crucial issues to monitor,” she added. “Looser financial conditions and a weaker USD would permit Egypt to loosen its present tightening posture, which we do not anticipate before the end of the first half of 2023.”

WATCH THIS SPACE- The Fed is widely expected to continue to slow the pace of its interest rate hikes with a smaller 25-bps increase when it meets on Tuesday and Wednesday.

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