Egypt: CBE holds rates in June

The Central Bank of Egypt left its benchmark interest rates unchanged at its June 23 meeting, missing Bloomberg consensus and our own expectations for another hike. This left the overnight deposit rate at 11.25%.

We had expected more concerted tightening from the central bank in order to get ahead of inflation and move real interest rates back into positive territory, especially as the US Federal Reserve and other major central banks have accelerated their own tightening moves. CPI inflation rose to 13.5% last month, up from 13.1% in April. However, given the stance adopted in this latest communiqué even as inflation has ticked up, we have adjusted our expectations. Another hold now appears probable at the August meeting but we maintain our view that more tightening is likely this year, albeit at a slower pace, and we now have a year-end target of 12.25% for the overnight deposit rate. Pass-through of monetary policy to consumer demand is comparatively limited on the direct channel, but such a move by the CBE would alleviate pressure on the pound, which after the latest hold we now expect to depreciate at a modestly faster pace than we had previously envisaged. Currently trading at EGP 18.74/USD, we forecast an end-2022 rate of EGP 19.00/USD. One factor to watch out for is the finalisation of a new deal with the IMF which could bring rate hikes forward.

Real rates in negative territory

Source: Bloomberg, Emirates NBD Research

Explaining its decision, the bank’s statement noted that the pace of acceleration had already slowed and that much of the price pressures were coming from exogenous shocks related to the conflict in Ukraine which are ‘outside the scope of monetary policy and yet may lead to transitory deviations from pre-announced target rates.’ Egypt was particularly exposed to the disruption to global wheat markets caused by the war given that some 80% of its imports, upon which it is highly reliant, have traditionally come from the Black Sea region and food price inflation was at 24.8% y/y in May (down modestly from April’s 26.0%). The depreciation of the pound in March has also played a part in pushing prices higher. Therefore, the bank decided to temporarily tolerate inflation coming in higher than the target 7% ±2 as it expects it will ease once these pressures pass through.

One of the factors behind our forecast for more rapid tightening was an expectation that the CBE would be looking to support portfolio inflows once more. As monetary tightening in developed markets has gathered pace and the global growth outlook has deteriorated, foreign ownership of Egyptian local debt has declined, and reserves have dipped from USD 41.0bn in February to USD 35.5bn in May. However, even a particularly aggressive round of tightening would likely be insufficient to entice the return of these flows for the time being while global risk sentiment is at such levels, while it would at the same time put pressure on public finances. Government expenditure on debt servicing over the first 10 months of the present fiscal year (ending June) was up 9.9% y/y and accounted for 35.3% of total spending. Indeed, finance minister Mohamed Maait told the Qatar Economic Forum this week that ‘now is the time for Egypt to concentrate more on the increase of exports and foreign direct investments rather than the carry trade.’

The bank also stated that real GDP growth in the January-March period was 5.4% y/y, down from 8.3% the previous quarter and representing a normalisation from the pandemic crisis. Unemployment stood at 7.2% and the bank noted that an increase in the labour force was absorbed.