The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene for the first time in 2022 on 3 February to review key interest rates amid expectations that it will keep the current rates unchanged.

A recent report by Prime Holding expects the CBE to keep current interest rates on hold through the end of the first half of 2022 as Egypt’s headline inflation rate remains below the CBE’s target of seven per cent (± two per cent).

Over the course of eight meetings in 2021, the MPC maintained the CBE’s key interest rates at the same rates of December 2020, when the committee introduced a 0.5 per cent cut.

The CBE kept its overnight deposit rate, overnight lending rate, and the rate of main operations unchanged at 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively. It also left the discount rate at 8.75 per cent. The MPC decisions were guided by domestic inflation readings throughout 2021 that were below the CBE target.

In its readings released in January, the Central Agency for Public Mobilisation and Statistics (CAPMAS) said that Egypt’s monthly headline inflation rate continued to go down in December 2021, declining by 0.2 per cent to 5.4 per cent and down from the 5.6 per cent recorded in November and the 6.3 per cent reached in October, the lowest rate recorded since July.

Egypt’s annual inflation jumped in December to 6.5 per cent, up from six per cent in December 2020, fuelled by increases in food and beverage prices which rose by 9.7 per cent, healthcare services which inched up by 3.2 per cent, and education services which rose by 13.9 percent, CAPMAS said.

Egypt eyes cutting inflation rates to six per cent in the current fiscal year 2021-22, down from the 13.3 per cent recorded in the fiscal year 2018-19, according to Minister of Planning and Economic Development Hala Al-Said.

Rising inflation could erode high real interest rates in Egypt, which have been a key supporting factor for non-resident investment in the Egyptian pound bond market,

director of sovereigns at international ratings agency Fitch Ratings Krisjanis Krustins told Al-Ahram Weekly.

Foreigners held around $24 billion in Egyptian treasury bills of one year or less at the end of September, an all-time high according to CBE figures, Reuters reported in December.

“A reversal of non-resident inflows could put pressure on Egypt’s exchange rate and foreign reserves. This would likely prompt the CBE to raise interest rates, which would in turn weigh on growth and the budget balance,” Krustins added.

A reversal of foreign portfolio inflows would also put additional pressure on the foreign assets of Egyptian banks, which were on a declining trend in the second half of 2021 resulting in a negative net foreign liability position of $7 billion at the end of November 2021 compared to a net foreign assets position of $7 billion at the end of February 2021, director of financial institutions at Fitch Ratings Zeinab Abdallah told the Weekly.

She added that a shift in the CBE’s monetary policy and an increase in interest rates to maintain a positive carry trade and retain portfolio inflows would impact credit growth and capital expenditures financing opportunities.

The MPC meeting will come a few days after the meeting of the US Federal Reserve scheduled for 28 January.

In its final meeting of 2021 held in December, the Federal Reserve decided to keep US interest rates unchanged. But it indicated that it could resort to introducing increases to interest rates over three times in 2022 in order to tame inflation.

The US consumer price index climbed seven per cent in 2021, the largest 12-month gain since June 1982, the US news service Bloomberg reported.

An analysis published by US investment bank Goldman Sachs this week expected the Federal Reserve to be more aggressive than many economists expect in the way it increases interest rates during 2022, expecting four 0.25 per cent hikes over the year.

This projection is also driven by the surge in the Omicron variant of the Covid-19 worldwide and its related risks, according to Goldman Sachs.

The Federal Reserve decision could shape the decision by the MPC regarding Egypt’s key interest rates. Any rate increases in the US might prompt the CBE to increase rates as well in order to maintain the interest of foreign investors in Egyptian treasury bills and prevent a possible flight of portfolio investments.