The Monetary Policy Committee(MPC) of the Central Bank of Egypt’s (CBE) is scheduled to convene on Thursday March 30, 2023 to review the key interest rates for the second time in 2023 amid broad expectations of a surge in interest rates by up to three percent (300 bps).
In its last meeting in February, the MPC maintained the key interest rates. The overnight deposit rate, overnight lending rate, the rate of the main operation, and the discount rate were kept unchanged at 16.25 percent, 17.25 percent, 16.75 percent, and 16.75 percent, respectively.
“Soaring inflation rates in the local market will encourage the CBE to hike the key interest rates on Thursday. Tightening the monetary policy is a key tool used to tame inflation, especially in times of crisis, and preserve the stability of the local market and prices,” banking expert Hani Abul-Fotouh told Ahram Online.
Hitting the highest levels since August 2017, Egypt’s annual headline inflation jumped to 31.9 percent in February, up from 10 percent in February 2022, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS) early in March.
The surge was driven mainly by the significant increase in food and beverage prices.
Core inflation climbed to 40.3 percent in February, up from 3.12 percent in February 2022.
Abul-Fotouh expects the CBE will hike interest rates by 2-3 percent (200-300 bps) in the face of elevating inflation.
A report published this week by the HSBC also expected the CBE will announce a three percent increase on Thursday in an attempt to put the brakes on borrowing and enhance economic growth rates.
Earlier in March, Goldman Sachs Group projected the CBE will raise interest rates by three percent.
Meanwhile, the Research Department of HC Securities and Investment’s report this week projected a two percent hike at the upcoming MPC meeting.
The report expected Egypt’s headline inflation to maintain its acceleration to hit 35.9 percent by July, when the FY2023/2024 will be rolled out, before gradually declining to 30.3 percent by December. The surge will be driven mainly by the 7-11 percent increase in gasoline prices in early March and the 20 percent increase in heavy fuel oil prices for all industries except food and electricity generation sectors. The hike in inflation is also expected on the back of the anticipated increase in the price of household electricity from 1 July, the recent liberalisation of the price of some basic food commodities such as rice, and a shortage in the domestic poultry supply, the report noted.
The 20 percent devaluation of the Egyptian pound since the beginning of the year, as a result of the decline in foreign currency income, has widened the gap in liabilities and assets in the banking sector in foreign currency, the report added.
Financial analyst and economist at HC Heba Mounir told Ahram Online that the continuing EGP devaluation is one of the factors behind the peaking inflation HC expects.
“In light of the inflationary pressures, the US dollar shortage in the local market, and Egypt’s need to keep the carry trade attractive, we calculate a required 12-month treasury bills rate of 25.18 percent, which considers soaring Egypt’s one-year CDs to 1,419 from 670 at the beginning of February,” according to Mounir.
A Morgan Stanley report released this week said Egypt’s huge external financing needs are weighing on its macroeconomic outlook, adding that a large-scale privatisation program as well as the adoption of a permanent exchange rate system could ease the financing pressures the Egyptian economy suffers.
Egypt is currently engaged in a $3 billion loan agreement with the International Monetary Fund (IMF), which estimates Egypt’s financing gap at $17 billion through FY2026/2027.
According to the government’s commitments under this deal, Egypt will finance the lion’s share of this gap through selling state-owned assets.
Morgan Stanley’s report expected Egypt to sell assets valued at as much as $7 billion by 2024 to boost foreign exchange liquidity and public finances and narrow the financing gap.
Abul-Fotouh expects the CBE to further devaluate the Egyptian pound by 10-15 percent on Thursday if the CBE raises the interest rates.
He anticipated the US dollar trading price to jump to EGP 35-36, explaining that a further devaluation would be necessary to curb dollarisation in the local market, increase the EGP attractiveness, and accelerate the initial public offering process.
