What will the CBE decide on key interest rates in its final meeting for 2023?

Doaa A.Moneim , Wednesday 20 Dec 2023

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene on Thursday in its final meeting for 2023 amid mixed expectations of either raising or maintaining the current key interest rates.

The Central Bank of Egypt (CBE) headquarters, Cairo, Egypt. Photo: AP


The gathering occurs amid a particularly challenging time for the Egyptian economy, which is grappling with soaring inflation and a severe shortage of US dollars in the market. These difficulties are compounded by the aftermath of the Israeli war on Gaza, which has led to concerns about the Red Sea's safety following Houthis attacks on ships heading to Israel.

These attacks prompted six major global shipping and oil companies to halt their Red Sea and Suez Canal shipments.

Suez Canal, maritime services, and merchandise exports are key sources of the $191 billion the government plans to collect through 2026 in a bid to tackle the dollar shortage.

The meeting also comes a few days after the re-election of President Abdel-Fattah El-Sisi for a third term in office. In the wake of the election, the local market anticipates a fourth devaluation of the Egyptian pound against the US dollar and a hike in key interest rates as a part of the government’s commitments under the $3 billion 46-month loan programme with the International Monetary Fund (IMF).

In its November meeting, the MPC kept the key interest rates unchanged at 19.25 percent, 20.25 percent, 19.75 percent, and 19.75 percent for the overnight deposit rate, overnight lending rate, the rate of the main operation, and discount rate, respectively.

Since March 2022, the CBE hiked key interest rates by a total of 11 percent (1100 bps).

EFG Hermes adjusted its projection from maintaining the current interest rates to expecting a hike to the key interest rates by 2-3 percent (200-300 bps) on Thursday meeting.

In a report issued last week, EFG Hermes attributed this shift to the latest statements made by the Managing Director of the International Monetary Fund (IMF) during COP28 in the UAE.

Georgieva stated that the IMF’s $3 billion loan deal with Egypt will see progress soon with a priority to curb the soaring inflation rather than adopting a flexible exchange rate.

In this respect, the report projected Egypt’s headline inflation to slow down in December to 34 percent, in January to 29 percent, and in March to 20 percent.

Egypt’s annual headline inflation cooled to 36.4 percent in November, down from 38.5 percent a month prior, according to the latest data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Despite this decline, November’s inflation level remains well above 21.5 percent in the same month of 2022, and far beyond the seven percent (±2 percent) target the Central Bank of Egypt (CBE) has set through the end of 2024.

As per the CBE’s calculations, Egypt's annual core inflation rate eased by 2.2 percent in November, reaching 35.9 percent, down from 38.1 percent recorded in October.

Moreover, the annual headline urban consumer inflation rate decelerated to 34.6 percent in November, down from 35.8 percent in October, and the monthly headline urban inflation rate inched down to 1.3 percent in November, compared to one percent in October.

On the other hand, HC Securities expected the CBE to maintain key interest rates at the current levels.

“We reduced our expectation for Egypt's inflation, given the recent deceleration over the past two consecutive months, estimating urban inflation to rise by 1.9 percent (m-o-m) and 34.4 percent (y-o-y) in December, reflecting supply shortages of essential commodities and products mainly caused by the curbing of importation, exporting some crops and the USD shortage,” Heba Monir, financial analyst and economist at HC Securities, told Ahram Online.

She added that the Egyptian government has revised the country’s real GDP growth forecast for the current FY2023/2024, which ends at the end of June 2024, to 3.5 percent from an earlier forecast of 4.2 percent, which is lower than HC’s forecast of 4.0 percent.

Based on HC calculations, the gap between the US dollar rate in the currency parallel market and the official rate has widened to as much as 60 percent and 30 percent between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models.

Since March 2022, Egypt has devalued its local currency against the greenback threefold, allowing the EGP to lose over 75 percent of its value against the US dollar. In 2023, Egypt depreciated the EGP once.

“Recently, the Egyptian government resumed talks with the IMF regarding completing the first and second reviews of its $3 billion Extended Fund Facility (EFF) and additional financing, which is crucial to ensuring the implementation of the policy package, according to the director of the IMF’s Communications Department,” Monir explained.

On the global front, according to Monir, the inflationary pressures had eased due to major economies' monetary tightening and favorable base effects. Therefore, the US Federal Reserve maintained interest rates at its meeting last week.

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