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CBE keeps rates on hold

Daniel Richards - MENA Economist
Published Date: 21 March 2021

 

The Central Bank of Egypt (CBE) kept its benchmark rates steady at its March 18 MPC meeting, the third consecutive hold. This leaves the overnight deposit rate at 8.25%, close to the series low of 8.00%. While the domestic conditions arguably provided room for the bank to enact a rate cut, board members would have had an eye on international developments in bond markets, and ultimately chose to maintain their cautious approach. With Ramadan’s potentially inflationary pressures just ahead, the likelihood is now that the bank will remain on hold at its April meeting also, but we still see room for a rate cut by the CBE at the June or August meeting. We see scope for one more 50bps cut which would mark the end of the current cutting cycle.

Robust real interest rates

The decision to leave the benchmark interest rates unchanged leaves Egypt as one of the most attractive markets for international debt investors given that the real interest rate remains at a healthy 3.75%. Inflation did tick up modestly in February, rising to 4.5% y/y from 4.3% y/y a month earlier, and 0.2% m/m compared to a -0.4% m/m slowdown in January, but it remains well within the central bank’s target of 7% +/- 2pp at Q4 next year, and is sedate compared to the highs seen in the past several years. The MPC statement explained that unfavourable base effects drove the acceleration but highlighted that core inflation remained unchanged while food price inflation benefited from the pass-through of the tomato price shock which had driven up prices previously.

Egypt benchmark rates (%) remain on hold

Source: Bloomberg, Emirates NBD Research

Although the seasonal effects of the Ramadan month could induce some upward price pressures, the outlook over the year more generally remains manageable in terms of inflation, despite some rising global commodity prices. As such we still anticipate one more rate cut by the CBE as it looks to support growth and the government’s fiscal position. The closing line of the bank’s communiqué, largely unchanged since April 2020, still says that it will ‘not hesitate to utilize all available tools to support the recovery of economic activity.’

Maintaining portfolio inflows

With domestic conditions relatively favourable to a rate cut, the decision to remain on hold once more was likely driven by international considerations, and what has been happening in the US bond market especially. As yields on the US 10-year have risen rapidly this year on the back of reflation concerns – despite the Fed and its chair Jerome Powell repeatedly stressing the line that there will be no tightening of policy until there is a durable economic recovery in place – emerging market central bankers will be wary of a repetition of the 2013 taper tantrum. Foreign holdings of Egypt’s debt have risen to USD 28.5bn in February, a new record high and a swift recovery from the outflows seen as the pandemic hit last year. With rising uncertainty in global markets despite the Fed’s push back and yields on the US 10-year now back at 1.72%, the CBE will be keen to maintain a robust real interest rate and forestall any disorderly departure of these foreign funds.