Central Bank of Egypt holds rates

As was widely expected, the Central Bank of Egypt kept its benchmark interest rates unchanged at its meeting on June 28, namely 16.75% for the overnight deposit rate and 17.75% for the overnight lending rate. This was the second consecutive meeting at which the bank held rates static after two 100 bps cuts earlier in the year. The CBE had been forced to hike by a cumulative 700 points after it devalued its currency at the end of November 2016, which led to a peak of 33.0% inflation mid-2017. With the devaluation in the base, and inflation falling, the bank had room to begin normalising policy earlier in 2018. However, the cutting process has been put on hold as a number of key factors have led the bank to adopt a more cautious approach to monetary loosening.

Egyptian interest rates

Source: Emirates NBD Research

First, inflationary pressures are set to pick up over the next several months as a raft of subsidy cuts have come into effect with the start of the new fiscal year. Petrol prices have increased by as much as 50%, cooking gas by 60%, and electricity by 21% for households and 42% for factories. Further, as an oil importer, Egypt is being challenged by the strong rise in oil prices over the course of the year, in common with a lot of other EMs. While inflation fell to just 11.4% last month, the lowest level since April 2016, it is widely expected to pick up again hereafter on the back of these factors – though given that the hikes were signalled, and price growth is being driven primarily by supply side issues, this will not be back to the levels seen last year. As such, a hike is not expected, and the bank’s target range of 13.0% ± 3 in Q4 2018 remains realistic.

Maintaining the backing of the IMF will also likely have been a consideration for the MPC, given its strong support for high rates previously. In a positive sign, on June 29 the fund approved the latest USD 2bn tranche of Egypt’s USD 12bn support programme, which will take the total funding dispersed to USD 8bn. The IMF said that ‘Egypt has begun to reap the benefits of its ambitious and politically difficult economic reform programme.’

Other factors which will have likely contributed to the MPC’s decision to hold rates include the need to maintain the portfolio inflows the country has enjoyed since the removal of the pound’s peg to the dollar, especially in light of tightening global monetary conditions, which the bank highlighted in its communiqué. Nevertheless, we maintain the view that the rate-cutting cycle will be resumed later in the year, projecting two further cuts of 100 bps each in 2018.

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