Analysts at BNP Paribas expect the Central Bank of Egypt (CBE) to increase interest rates by 200 basis points (bps) in an emergency meeting this week ahead of the scheduled meeting on 19 May, according to a research note.
However, an official source at the CBE told the state-owned Middle East News Agency (MENA) that the Monetary Policy Committee (MPC) will meet on 19 May as planned, adding that there is no need to amend the date of the meeting.
The research note pointed to the out-of-consensus call as being on top of the 100bp rate hikes they were already expecting in both CBE’s Monetary Policy Committee meetings in August and September.
“We now forecast hikes of 200 bps in May and 100 bps in both August and September, taking the policy rate to 13.25% by Q4, as we expect inflation to peak in Q3. This compares with our previous forecast of an end-2022 policy rate of 12.25%,” the note read.
This comes following the US Federal Reserve decision on Wednesday raising its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation.
BNP Paribas says that the market view on the US Fed has arguably become more hawkish since the last EGP devaluation, with the US implied policy rate now sitting at 2.835% by the December FOMC vs. 2.188% on 21 March (the date of the last EGP devaluation) – according to Bloomberg data.
Accordingly, the analysts believe that Egypt’s T-bill yields will climb to 17-18% by Q4, while inflation will average at 12.2% in 2022.
“We think real yields need to rise materially from the current 3% level, and a decently-sized IMF deal needs to be secured, before foreigners are incentivised back into the local debt market,” the note explained.
Moreover, investor demand for Egyptian government T-bills recovered to 2.1x in the April auctions, from 1.5x in March, according to CBE data, the research note indicates. However, BNP Paribas thinks this is mostly a reflection of increased demand by local institutions as opposed to foreigners, whose net inflow into Egyptian local-currency debt is likely still negative.
“In our view, given the challenging global rates outlook and risks associated with the Ukraine war, Egypt needs another 300–400 bps in policy rate hikes to incentivize foreign inflows back into EGP-denominated debt. We see T-bill yields climbing to 17–18% by Q4, with inflation averaging 12.2% in 2022, restoring real yields to about 4–5%,” the note concludes.