Experts and economists agreed that the Central Bank of Egypt (CBE) will raise interest rates during its meeting on Thursday but did not agree on the rate hike.

 

A Reuters poll forecasted that the central bank will raise its overnight deposit rate by 100 basis points (bps) as it tries to dampen resurgent inflation.

 

 

The median forecast in a poll of 15 analysts is for the bank to raise its deposit rate to 12.25% and its lending rate to 13.25% at its regular monetary policy committee meeting.

 

 

The committee will meet a day after a meeting of the Federal Reserve, which is expected to raise US interest rates.

 

 

The CBE kept its rates on hold at its last two meetings, on June 23 and August 18, but raised them by 200 bps in May, saying it was seeking to contain inflation expectations after prices surged by their fastest in three years.

 

 

“A continued rise in inflation and in parallel Egyptian pound weakness warrant further monetary tightening,” said Mohamed Abu Basha of EFG Hermes.

 

 

Cairo’s annual urban consumer inflation quickened to 14.6% year-on-year in August from 13.6% in July, while core inflation rose to 16.7% from 15.6%.

 

 

The central bank has an inflation target range of 5-9%, but in June said it would tolerate a higher level until after the fourth quarter.

 

 

Not all analysts expect a rate hike.

 

 

Wael Ziada of Zilla Holding said most of the economic shock to Egypt has been external and has already been reflected in the domestic inflation rate. Any interest rate increase would have little effect on inflation.

 

 

“External variables with regard to oil prices and the food price index may indicate that the worst in terms of importing inflation has passed,” he added.

 

 

HC Securities and Investment expected the CBE to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting.

 

 

Financials analyst and economist at HC, Heba Monir commented: “The annual August inflation is the highest recorded since May 2019, as the pricing of imported commodities at a higher exchange rate and supply bottlenecks negatively impacted it.”

 

 

At these levels, the annual inflation rate is well above the CBE's pre-announced target of 7% (+/-2% for Q4 2022), and the HC estimates it to average 14.3% until the end of the year.

 

 

Regarding Egypt's external position, Monir said the HC believes that pressure is accumulating.

 

 

Currently, Egypt offers a real yield on 12-month T-bills of 208 bps (given the current 12-month T-bills rate, HC’s 12-month inflation estimate of 12.25%, and a 15% tax rate for European and US investors) compared to a real return on the US 1-year notes of negative 245 bps (given 1-year notes yield of 3.83%, Bloomberg average 12 million inflation estimate of 6.28%, and assuming no taxes).

 

 

Based on HC’s assumptions and calculations, Egyptian 12-month T-bills need to increase in 2022 to 17.3% from 16.9% currently to remain attractive, Monir stressed.