CBE to review interest rates amid strong expectations of no change

Hossam Mounir
7 Min Read
The Central Bank of Egypt (CBE) has launched a new EGP 15bn initiative to finance the dual-fuel vehicle conversion plan, with a lump-sum return of 3%. In a Sunday letter to banks, the CBE said that the initiative aims to support the government’s ambitious, recently announced multi-year plan to replace car engines powered by traditional fossil fuels with dual-fuel engines that run on both petrol and natural gas.

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) will hold its third periodic meeting this year, on Wednesday, to discuss the fate of the country’s basic interest rates.

The meeting was scheduled to take place on Thursday, but the Bank decided to advance it because it will coincide with the Sinai Liberation Day holiday. 

Interest rates are the most important indicator of the Egyptian pound’s interest trend in the short term.

The committee decided at its last meeting, held on 18 March 2021, to maintain the basic interest rates for the third time in a row. This meant that they remained at the level of 8.25% for deposit, 9.25% for lending, and 8.75% for credit, discount, and main operation rates.

In a statement accompanying the decision, the MPC said that the basic interest rates are appropriate at the present time. They are also consistent with achieving the targeted inflation rate of 7% (±2%) on average during the fourth quarter (Q4) of 2022, price stability in the medium term, as well as achieving targeted non-inflationary growth rates.

Radwa El-Swaify, Head of Research at Pharos Holding, expects that the MPC would proceed to fix interest rates during its meeting this week.

“We expect inflation rates to range to less than 4% during Q2 of this year before witnessing an annual increase to reach 5-6% during the second half (H2) of this year, and that inflation rates will remain at an average of 4.5% by the end of the fiscal year, which is below the target range by the CBE at 7% (±2%) on average until Q4 of 2022,” she said.

El-Swaify also said that there are other reasons for maintaining the interest rate during the next meeting, including the current turmoil in the US Treasury bonds market. This constitutes pressure on flows to emerging markets, in addition to the CBE’s interest in stabilising inflation rates in the long term.

For its part, the Research Department at Beltone Financial expects that the CBE would keep interest rates unchanged during the upcoming MPC meeting scheduled.

Beltone attributed those expectations to the need to maintain the attractiveness of investment in the fixed income market, especially with the rise in global interest rates, which constitute pressure on flows to emerging markets.

In a research note, it said annual general inflation recorded 4.5% during March, unchanged from February’s reading, with a slight increase from the expectations monitored by it at 4.3%. This increase represents 0.6% compared to a rise of 0.2% in February on a monthly basis.

According to Beltone, the monthly increase in inflation was supported by an increase in food commodity prices by 2.2% in March versus price stability in February.

The agency expects an increase in the general inflation reading in Q2 and Q3 of 2021, as the rise in global commodity prices begins to gradually reflect on the local market. It also expects inflation to stabilise at a level less than the CBE’s target range of 7% (±2 %) on average, until Q4 of 2022.

It indicated that with the stability of food commodity prices on a monthly basis, after the decline that it witnessed during the past two months, coincided with a significant increase in global commodity prices as well as an increase in oil prices, the closest is to maintain interest rates during the next meeting of the Monetary Policy Committee.

HC Securities and Investment said they expect the CBE to keep interest rates unchanged at the upcoming meeting, on Wednesday. 

Head of Macro and Financials at HC, Monette Doss said, “March inflation figures came in slightly higher than our estimates of 4.4% year-on-year (y-o-y) and 0.5% month-on-month (m-o-m), which we believe reflects a correction from the previous suppressed levels.” 

She added, “Over the rest of 2021, we expect monthly inflation to average 0.9% m-o-m and 6.7% y-o-y accounting for rising international commodity prices and a possible pick-up in economic activity following the successful rollout of the COVID-19 vaccine.” 

Doss said that HC expects 2021 inflation to remain within the CBE’s target range of 7% (±2%) for Q4 of 2022. 

“Looking at the results of recent government Treasury bill (T-bill) auctions, we believe that foreign portfolio inflows are gradually regaining momentum as evident in the high coverage and possibly the beginning of a cool-off in yields from accelerated increases witnessed over the last couple of months,” she added, “In recent auctions, yields on US 10-year T-bonds declined to 1.57% from a high of 1.73% in the beginning of April, which we believe reflected positively on foreign portfolio inflows in Egypt.” 

Doss also said that they expect to see upward pressure on US treasury yields with the Bloomberg 2021 consensus inflation forecast for the US at 2.6%. Also, monetary tightening in other emerging markets, such as Turkey poses upward pressure on Egypt’s yields. 

Currently, Turkey offers a yield of 17.2% on 19M treasuries, resulting in a real yield of about 4%, on HC’s calculations, given zero taxes and Bloomberg consensus inflation estimate for Turkey at 13.2% over the period. 

This compares to a real yield of 3.9% on Egypt’s 12M T-bills, on our numbers, given 15% tax rate for US and European investors and our inflation forecast of 7.5% over the next 12 months. That said, HC expects the MPC to maintain rates unchanged in its upcoming meeting, she added.

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