Egypt’s Central Bank to Review Key Interest Rates on Thursday, The First Under IMF Loan Deal

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene, the first meeting in 2023, to review the key interest rates in light of the recent updates in the country’s macroeconomy.

The CBE hiked interest rates by an unprecedented eight percent (800 bps) over 2022.

The meeting, which comes a few days before releasing January inflation readings, will be held amid expectations that the MPC may hike interest rates by up to two percent (200 bps), as the local inflation maintains its upturn trend.

Egypt’s annual urban consumer inflation continued to rise in December, recording 21.3 percent, the highest since the end of 2017, according to the latest figures published early January by the Central Agency of Public Mobilisation and Statistics (CAPMAS).

Banking expert Hani Abul-Fotouh projected the CBE may raise the key interest rates by between one percent (100 bps) and two percent (200 bps) in its meeting as a monetary policy tool to tame the soaring inflation.

“Although CAPMAS has not announced January’s inflation readings yet, price trends in the local market indicate a continuous inflation rise, as prices are elevating day after another. Inevitably, the CBE will hike the interest rates amid the inflation wave,” Abul-Fotouh explained.

He expected inflation to keep its upward path to hit 24 percent and major banks in Egypt to issue new certificates of deposit (CDs) with an interest rate higher than 25 percent.

Banque Misr and the National Bank of Egypt (NBE) said on that the 25 percent CDs attracted EGP 460 billion. The two banks stopped issuing the CDs since this announcement.

The CDs were issued with a 25 percent annual yield and 22.5 percent monthly yield in December in a bid to tackle inflation and attract foreign currency. Private banks followed suit soon after with similar offerings.

The NBE and Banque Misr began issuing the CDs a few days prior to the CBE’s devaluation of the EGP on 11 January, sending the EGP to its lowest rate on record against the USD.

The Research Department of HC Securities and Investment expected the MPC to keep interest rates unchanged to allow the domestic market to absorb the interest rate hike of three percent applied in December.

Accordingly, the overnight deposit rate, overnight lending rate, and the rate of the main operation rose to 16.25 percent, 17.25 percent, and 16.75 percent, respectively.

The discount rate was also raised by 300 bps to 16.75 percent.

“The CBE declared that foreign investments in the Egyptian market exceeded $925 million in the week following the EGP/USD movement on 11 January.

In addition, carry trade is becoming more attractive to foreign investors,” Heba Monir, financial analyst ananeconomist at HC said.

Monir also projected Egypt’s headline urban inflation to accelerate to 23.5 percent in July before it retreats to 18.2 percent in December 2023, averaging 21.5 percent throughout 2023.

Under the new IMF-backed loan deal, the CBE pledged to support the monitoring of inflation with a Monetary Policy Consultation Clause (MPCC), which will trigger consultations with IMF staff when annual headline urban CPI inflation falls outside the CBE’s inflation target of seven percent (±2 percent), and with the fund’s Executive Board if inflation falls outside the outer three to 16 percent in March 2023, and three to 15 percent in June 2023.

The CBE is also committed to continue transitioning away from subsidised lending schemes so that lending rates in the economy are anchored to the policy rate.

The CBE started this process in December by handing off its subsidised lending initiative for the industrial, construction, and agricultural sectors to the Ministry of Finance.