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Egypt: CBE keeps rates on hold again

Daniel Richards - MENA Economist
Published Date: 23 September 2022


Egypt’s central bank kept its benchmark overnight deposit rate on hold at 11.25% at its September 22 MPC meeting, as we had expected. In this regard it is bucking the global trend, where we have seen a raft of central banks hike their rates over the past several days as they grapple with inflation. The decision to leave rates on hold leaves Egypt’s real interest rates deeper in negative territory, but the bank argues that much of the inflation is imported, and that policy is tightening in any case; the CBE did raise its required reserve ratio, implying that it is looking to tighten policy through other means.

Rates on hold

Source: Bloomberg, Emirates NBD Research

Egypt’s CPI inflation rate rose to 14.6% in August, up from 13.6% the previous month. Prices were 0.9% higher than in July. Food & beverages, the largest component of the basket, was the primary driver of the headline acceleration as it rose from 22.4% in July to 23.1%, but the rise was broad based across all components, and core inflation also rose higher, from 15.6% to 16.7%. The bank’s statement said that price rises were largely emanating from supply side issues related to the international commodity price spike, however, rather than overheating demand, implying that there is little use in hiking rates just now. We expect that inflation will likely peak soon as S&P Global’s PMI survey for August showed a softening in input price rises.

The reasoning behind our expectation of a hold was that the CBE was unlikely to change rates while negotiations around a new IMF deal continued even after the high inflation reading in August. Even by year-end we project that the overnight deposit rate will be just 100bps higher, as the Egyptian authorities have vocalized an intention to encourage greater FDI flows rather than relying on the portfolio flows that appear to have been the focus of recent years. Nevertheless, the CBE did raise the required reserve ratio from 14% to 18%, and it maintains that the 300bps of hikes enacted earlier are still percolating through the economy, thereby tightening conditions. This could help tighten conditions without placing a further burden on government debt servicing costs, which make up around a third of expenditure.

EGP trending lower against the USD

Source: Bloomberg, Emirates NBD Research

There remain questions over the currency trajectory in the coming months and whether or not the IMF will require a sizeable devaluation of the pound before a deal can be agreed. Given the stated commitment to a more flexible exchange rate regime in recent months we rather expect that the recent steady depreciation will continue.

In terms of growth, the statement declared that real the GDP expansion was an above-expectations 6.6% in the fiscal year ended June 30 following a provisional print of 3.2% y/y in the final quarter. Growth was driven by private sector activity including manufacturing. The CBE acknowledged that growth would slow in the present fiscal year, however, and indeed, we forecast a growth rate of 4.1% in 2022/23.