Egypt Update MPC holds rates

The Central Bank of Egypt kept its benchmark interest rates unchanged on Thursday, as concerns over rising oil prices and upcoming subsidy cuts trumped the desire to stimulate private consumption. The hold followed two interest rate cuts in February and March which took the overnight lending rate and the overnight deposit rate to 17.75% and 16.75% respectively. With the fall in y/y inflation slowing in April, and the m/m rate rising to levels last seen in mid-2017, a hold was always a possibility. However, we had anticipated that with the latest annualised inflation print of 13.1% well within the target range of 13.0% ± 3, the bank would take the opportunity to make one more cut before the new fiscal year brought further subsidy cuts in July.

According to the MPC’s communiqué, higher global oil prices were a primary factor behind its reasoning, given they have led to the ‘materialisation of an upside risk to the domestic inflation outlook.’ Brent crude has risen to USD 78.5/b at the time of writing, from USD 53.9/b a year earlier. While we expect prices to moderate, we have revised up our average forecast for 2018 to USD 69/b, and given the ongoing fuel subsidy reform in Egypt, this will impact more directly upon consumers than it would have done in previous years. The MPC also cited the ‘pace of tightening financial conditions’, highlighting the risk that the normalisation of monetary policy in developed markets poses to emerging markets globally.

Egyptian interest rates

Source: Bloomberg, Emirates NBD Research

Given that the CBE passed on the opportunity to implement a rate cut last week, we expect that rates will now be held over at least the next two meetings in June and August, and potentially also September, with two further cuts likely in the final months of the year. The bank will want to wait and see the effect the higher oil prices and the upcoming subsidy cuts have on inflation. A key determining factor will also be whether the portfolio inflows that were enticed by high interest rates over the past 18 months will be maintained as the CBE cuts rates. Foreigners’ t-bill holdings actually increased 10.1% m/m in January (after declining 3.1% in December), despite widespread anticipation of rate cuts, but with Turkey and Argentina both engaged in rate hiking, and the more general tightening conditions highlighted by the bank, Egypt’s attractiveness to international investors could begin to wane.

We anticipate that other inflows – exports, remittances, FDI, equity investment – will begin to offset slower inflows into treasury bills, and that the greater political and economic stability in Egypt would in any case mitigate some of the fall in yield. Nevertheless, with the Egyptian pound having fallen to EGP 17.9254/USD last week, a level not seen since August, the CBE will be especially wary over the next several months. Oil prices and the dollar have traditionally moved in lockstep, but with this relationship currently broken, the risks from both a stronger dollar and higher oil prices to oil-importing emerging markets such as Egypt are profound.

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