CBE unexpectedly holds interest rates steady in its first meeting of the year: The Central Bank of Egypt (CBE) left interest rates unchanged on Thursday, defying expectations of a third consecutive hike. The Monetary Policy Committee (MPC) left the deposit rate at 16.25%, the lending rate at 17.25%, and the main operation and disc. rates at 16.75%, it said in a statement (pdf) following its policy meeting.

The wait-and-see approach: The central bank said it was keeping rates unchanged as it waits to see the full impact of the 800 bps of hikes it made in 2022 to counter high inflation. Most of that tightening came late in the year, with the central bank enacting a jumbo 300-bps rate hike at the end of December before allowing the EGP to slide to a fresh low against the greenback in January. “The MPC decided to maintain key policy rates unchanged in today’s meeting in order to assess the impact of the implemented front-loaded tightening policies,” the statement reads.

A surprise hold: Four of the seven analysts surveyed by Enterprise ahead of the meeting expected the central bank to hike rates by 100-200 basis points on the back of persistently high inflation. The median estimate in a Reuters poll was for a 150-bps hike. Two analysts — HC Securities banking and macro analyst Heba Monir and Faisal Islamic Brokerage’s head of research, Hesham El Shebeini, — told us they thought the CBE would likely keep rates steady to maintain growth while the market absorbs December’s jumbo hike .

The right call? “Further tightening of the monetary stance may have been justified in order to manage inflation expectations in the aftermath of the depreciation of the EGP over the past month and upcoming upward fuel price adjustments,” Goldman Sachs’ Farouk Soussa is quoted as saying by Bloomberg. “Higher rates may also be needed to stimulate further portfolio inflows.”

Inflation is still running high: Annual urban Inflation jumped to a five-year high of 21.3% in December, up from 18.7% the month before, as the impact of successive currency devaluations continued to feed through to the economy. Core inflation, which strips out volatile items such as food and fuel, recorded 24.4% y-o-y in December — its highest since December 2017. The central bank is targeting inflation of 7% (± 2%) by 4Q 2024. “Demand side pressures on inflation continue to be present, as evidenced by developments in real economic activity relative to potential capacity and the impact of recent exchange rate fluctuations,” the MPC said. Inflation figures for January will be released later this week.

And future hikes are not off the table: The MPC didn’t rule out the possibility of future rate hikes, noting that “maintaining tight monetary conditions [is] a necessary condition to achieve the CBE’s upcoming inflation targets and price stability over the medium term.” Six of the seven analysts we surveyed expect rates to rise by a total of 100-250 bps over the course of 2023. All of them expect inflation to continue rising in the coming months and to remain elevated over the course of 2023, driven by the EGP depreciation, 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.

The Fed is taking it slow, too: The Federal Reserve last week raised rates by 25 bps to a target range of 4.5-4.75% as it switches to a more moderate pace of monetary tightening.

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