Will the Central Bank hike interest rates in Thursday's meeting?

Doaa A.Moneim , Thursday 22 Dec 2022

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is set to hold its final meeting for 2022 on Thursday to review the key interest rates in light of the latest updates in the local and global economic scene, particularly the accelerating inflation rates.



The meeting comes amid expectations that the CBE will hike the interest rates by a maximum of 2 percent (200 bps) as well as deliver a further depreciation of the Egyptian pound against the US dollar.

It also comes after the announcement of a new International Monetary Fund-backed (IMF) 46-month economic reform programme for Egypt, under which the country will receive a $3 billion loan.

Speaking to Ahram Online, banking expert Ahmed Shawky said he expects the CBE will raise the interest rates by 2 percent in response to the rapid pace of inflation, which the CBE aims to reduce to around 7 percent (±2 percent).

Shawky noted that the expected hike will not have a positive effect on the local market over the short term, especially since the soaring inflation is being caused by increasing prices globally.

Since the war in Ukraine started in March, the CBE hiked its key interest rates by a total of 5 percent (500 bps) and devaluated the Egyptian pound by over 30 percent in a bid to put the brakes on inflation. Moreover, $25 billion in indirect investment in local debt instruments have since fled the market.

“Raising the interest rates on Thursday, if applied, will drive the debt services to jump, the financing costs to rise, and will negatively affect the government’s target of attaining inclusive growth by increasing the role of the private sector in economic activity,” Shawky explained.

Regarding the IMF deal and its possible impact on Egypt’s monetary policy, Shawky said the amount of the loan will not reinforce the country’s budget or its balance of payments.

“The first tranche of the loan, which is worth $347 million, is equivalent to only 1.8 percent of the revenues the Suez Canal achieved over the past 10 years. The deal is just a testimony to the Egyptian economy and a greenlight for Egypt to secure more finances and to support the country’s relations with trade partners, no more,” Shawky explained.

Following the loan deal announcement on Friday, the IMF said the programme aims to set the value of the Egyptian pound freely against other currencies by applying a flexible exchange rate, which would avoid the build-up of chronic imbalances in demand for, and supply of, foreign currency in Egypt, as well as preserve the FX reserves of the central bank.

Shawky also predicted that the US dollar will maintain its strength against the Egyptian pound over the long term.

Meanwhile, HC Securities and Investment have predicted that the CBE will raise the interest rate by 2 percent in a Thursday meeting in order to confront the elevating inflation.

“Inflation accelerated in November, rising by 2.3 percent (M-o-M) and 18.7 percent (Y-o-Y) and exceeded our estimate of 16.5 percent. This acceleration in inflation, coupled with the current shortage in foreign currency inflows, led us to expect an annual inflation rate of 19.1 percent in December,” Heba Monir, Financial Analyst and Economist at HC Securities and Investment, told Ahram Online.

Egypt’s urban inflation continued its accelerating pace in November to reach its highest level in five years, recording 18.7 percent in November, according to the latest readings released by the Central Agency for Public Mobilisation and Statistics (CAPMAS).

Monir also said the Egyptian pound has depreciated by 7 percent since 27 October, driven by the accumulated pressures on Egypt's balance of payment and high foreign debt obligations.

Egypt’s external debt-to-GDP ratio is expected to increase to 38.8 percent in the current FY2022/23, up from 37.7 percent in FY2021/22, according to official estimates. Moreover, the country’s net international reserves (NIRs) retreated by 18 percent (Y-o-Y) in November to post $33.5 billion, with a 67.7 percent (Y-o-y) growth in gold versus a 22.3 percent (Y-o-Y) decline in foreign currencies. Meanwhile, August remittances declined by 8 percent (M-o-M) to reach $2.2 billion.

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