CBE to Decide on Key Interest Rates on Thursday Amid Rising Inflation

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is set to convene to review the key interest rates for the third time in 2022 and for the second time since the breakout of the Russian-Ukrainian conflict.

The meeting comes amid expectations that the MPC would raise the interest rates by up to two percent (200 basis points), as headline inflation rates in Egypt rose amid an elevated global inflationary wave, escalation in the war in Ukraine, and tighter monetary policy by the US Federal Reserve (Fed).

Since the beginning of 2022, the Fed has hiked the benchmark interest rates by 0.75 percent (75 basis points) and said it could raise the rates by up to 2.8 percent (280 basis points) by the end of the year to curb inflationary pressures.

Following the Fed’s move, the CBE’s MPC raised its key interest rates on 21 March by one percent (100 basis points) and devalued the Egyptian pound by about 14 percent in a bid to mitigate the impacts of the Ukrainian war, particularly in terms of slowing hot money outflows as well as maintaining the stability of the local currency and market in general.

In an international press conference held on Sunday, Prime Minister Mostafa Madbouly revealed that capital outflows from the Egyptian market reached $20 billion since the onset of the Ukrainian war, estimating the cost of the direct impact of the war on the Egyptian economy at EGP 130 billion and the cost of indirect impacts at EGP 335 billion.

According to the latest readings published by the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s headline annual inflation rate accelerated to 14.9 percent in April, up from the 12.1 percent recorded in March, with inflation in urban areas increasing to 13.1 percent in April, up from 10.5 percent in March, driven mainly by food and energy price hikes.

HC Securities and Investment said it also expects the CBE to increase interest rates by two percent amid the rising inflation on the global and local levels.

“April’s inflation figures came in higher than our estimate of 12.3 percent and Reuters’ median consensus estimate of 11.8 percent driven by a 48.8 percent Y-o-Y increase in fruit and vegetable prices, while bread and grains increased by 28.5 percent Y-o-Y, according to CBE and CAPMAS data,” said Monette Doss, the head of Macro and Financials at HC.

“We believe that several factors triggered food inflation, including seasonal demand during the month of Ramadan, the 18 percent devaluation of the EGP since 21 March, and increasing global prices following the Russian-Ukrainian war,” Doss added.

However, Doss expects further increases in food prices to decelerate over the coming month as demand neutralises after the month of Ramadan.

She also projected inflation to continue rising to 14 percent through the end of FY2021/22 ­— which concludes by the end of June — due weak purchasing power resulting from lower employment levels and directing most demand to food staples.

Banking expert Ahmed Shawky told Ahram Online he expects the CBE to raise the interest rates by about one percent (100 basis points) due to global inflation that has pushed up inflation locally.

However, Shawky pointed out that the measures the CBE took in March along with the financial measures taken by the Ministry of Finance has helped maintain the stability of the domestic market and the positive performance of the EGP.

There is room accordingly for the CBE to maintain the current interest rates in its upcoming meeting, Shawky said.

“Raising interest rates will lead to an increase of production and operation costs as well as a climb in commodities and goods’ prices in the domestic markets relatively. The financial procedures the government has adopted since March at a cost of EGP 130 billion were meant to deal with such implications in the event the CBE chooses to raise the interest rates,” Shawky explained.

Additionally, he expects the CBE to further raise the interest rates by an additional two percent over 2022 amid the continuing global economic challenges.

Meanwhile, Belton Financial Holding projected the CBE to raise the interest rates by between 0.5 percent (50 basis points) and one percent (100 basis points) to curb the rising inflation and to keep the attractiveness of the fixed-income investment instruments in the local market amid pressures imposed on capital flows heading to emerging markets, including Egypt, as a result of the ongoing economic travails.

According to its recent research paper, Belton also expects Egypt’s inflation to exceed the CBE’s inflation target, which is set at seven percent (+/- 2 percentage points) by the end of 2022, adding that this trend boosts the bank’s orientation towards additional interest rate hikes.