The Central Bank of Egypt (Photo: Al-Ahram)
The meeting will be held amid expectations the MPC will maintain the current interest rates. Tightening the monetary policy by raising interest rates is not effective at the time being to contain the soaring inflation in the country.
Moreover, the US Federal Reserve (Fed) is expected to announce its decision on the benchmark interest rates today amid projections it may maintain the current interest rates in light of the latest inflation and employment data in the US.
“The MPC is anticipated to keep the current interest rates unchanged in its meeting on Thursday in light of the country’s expected real GDP growth slowdown and the elevating inflation,” banking expert and CEO of AlRaya Consulting Hany Abul-Fotouh told Ahram Online.
Egypt’s monthly inflation accelerated in September by two percent to exceed 38 percent. The annual headline inflation decelerated in September to 38 percent, down from 39.7 percent in August, according to a Central Agency for Public Mobilization and Statistics (CAPMAS) report in October.
In its latest meeting in September, the MPC maintained key interest rates at 19.25 percent, 20.25 percent, and 19.75 percent for overnight deposits, overnight lending, and the rate of the main operation, respectively. The discount rate remained at 19.75 percent.
The pause on interest rate change comes after a total of 11 percent hikes (1,100 bps) introduced since March 2022.
“Both the International Monetary Fund (IMF) and the World Bank (WB) have projected Egypt’s real GDP growth to markedly decelerate in the current FY2023/2024 compared to a fiscal year earlier. In addition, the country’s inflation is expected to maintain its upturn at least through the end of 2023 in light of the ongoing geopolitical escalation and challenging local economic situation. This is why the MPC is expected to keep the current interest rates on hold,” Abul-Fotouh explained.
In October, the IMF lowered its forecast for Egypt’s real GDP growth to 3.6 percent in 2024, down from 4.1 percent it forecast in July. However, the fund raised its projections for Egypt’s real GDP growth in 2023 to 4.2 percent, up from 3.7 percent it expected in July.
Meanwhile, the WB downgraded the country’s growth forecast for 2024 to 3.7 percent from four percent and revised up its forecasts for Egypt’s real GDP growth in 2023 to 4.2 percent from four percent.
According to Abul-Foutoh, the CBE needs to focus more on supporting the country’s real GDP growth rather than curbing the soaring inflation. However, he stressed that this may further contribute to feeding inflation and, consequently, lower the purchasing power of the people.
Furthermore, the government may seize this opportunity to finance its expenses by obtaining further loans from banks, but this will lead to an increase in the public debt.
HC Securities and Investment also projected the MPC will hike key interest rates by a total of two percent (200 bps) in its November and December meetings, of which a one percent (100 bps) rise is expected on Thursday.
“Interest rate hikes may help defend the currency against dollarization and gold purchases by Egyptians, despite the fact we would still be in the negative real yield territory until inflation normalizes again,” HC said in a comment sent to Ahram Online.
HC projected Egypt's inflation to continue rising by 2.6 percent m-o-m and 38 percent y-o-y in October, reflecting supply shortages of essential commodities due to the curbing of imports, exporting some crops, the dollar shortage, and the seasonality effect of the partial start of the academic year.
Egypt’s dollar crunch has led to a significant rise in the US dollar rate in the parallel market. It also drove two major international credit rating agencies to downgrade Egypt’s long-term credit rating to B- but with a stable outlook.
The US dollar is traded for almost EGP 31 in the official market and over EGP 45 in the parallel market.
HC also pointed out to the downgrade both Moody's and S&P Global have recently applied to the Egyptian government's long-term foreign and local currency issuer ratings due to Egypt's worsening debt affordability. This is a factor that may lead to keeping the current interest rates unchanged, HC added.
"Other factors include the surge in Egypt's one-year Credit Default Swap (CDS) to 2,013 bps from 1,230 in mid-September, widening the gap between the parallel and official FX rates to as much as 50 percent and 30 percent between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models.
“Based on our calculations, the inflation differential between the US and Egypt increased to 34.4 percent in the fourth quarter of 2023 from 33.8 percent a quarter earlier. The 12-month yield on US treasuries was raised to 5.42 percent, from 4.67 percent in January 2023. Meanwhile, Egypt offers a negative real yield of four percent on its 12-month T-bills,” HC reported.
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