The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its fourth periodic meeting in the current year on Thursday to discuss the fate of the basic interest rates, which are the main indicator of the direction of interest rates on the Egyptian pound in the local market.
The committee’s meeting this time comes amid a discrepancy in market expectations about the CBE’s possible decision, as some expect the MPC to stabilize the rates after increasing it 3% in March and May, while others expect a further rise in light of hiking inflation.
The CBE had already expected inflation to temporarily exceed its target for the last quarter of this year.
In its last statement accompanying the decision to raise interest rates by 2% on 19 May, the MPC said that given the initial effects of the current supply shocks, it is expected, on a temporary basis, that inflation rates will exceed relatively the target of 7% (±2%) on average, during the last quarter of this year, then inflation rates will gradually decline.
The committee decided in this meeting to raise the basic interest rates with the Central Bank by 2%, to reach 11.25% for deposit, 12.25% for lending, and 11.75% for the credit and discount rate and the price of the main operation of the Central Bank.
The decision of the MPC was widely expected at the time, due to the large increase in inflation.
The committee said that the trade sanctions imposed on Russia and the resulting bottlenecks in the supply chains led to a rise in global prices of basic commodities, such as world prices for oil and wheat, in addition to the impact on the global supply of wheat due to bad weather conditions and low yields in certain regions, and in at the same time, global financial conditions have been constrained, as central banks abroad continue to tighten monetary policies by raising interest rates and slashing asset purchase programs to contain high inflation at home, and recent lockdowns in China are raising concerns about the potential to exacerbate unrest.
It added that while both food commodities and non-food commodities in Egypt were affected by the depreciation of the Egyptian pound as of 21 March, 2022 and the seasonal pattern for them.
The committee stressed that raising the basic interest rates at the Central Bank by 2% is a necessary measure to control inflationary pressures, and is consistent with achieving the goal of price stability in the medium term, pointing out that monetary policy tools are used to control inflation expectations, and reduce inflationary pressures from the demand side and the secondary effects of supply shocks because of their impact on inflation expectations and exceeding the previously announced target rates.
The committee indicated that achieving low and stable inflation rates in the medium term is a prerequisite for supporting the purchasing power of the Egyptian citizen and achieving high and sustainable growth rates, and also stressed that the current interest rates depend mainly on the expected inflation rates and not the prevailing rates.
It affirmed that it will closely follow all economic developments and will not hesitate to use all its monetary tools to achieve the goal of price stability in the medium term.
The Central Bank recently revealed that the annual core inflation rate had risen to 13.3% in May 2022, compared to 11.9% in April 2022.
The core consumer price index, adjusted by the Central Bank, recorded a monthly rate of 1.6% in May 2022, compared to 0.3% in May 2021 and 2.4% in April 2022.
The Central Agency for Public Mobilization and Statistics revealed that the annual inflation rate in Egyptian cities had risen to 13.5% in May 2022, compared to 13.1% in April.
The general urban consumer price index recorded a monthly rate of 1.1% in May 2022, compared to 0.7% in May 2021 and 3.3% in April 2022.
HC Securities and Investment expected the Central Bank of Egypt to keep the interest rate unchanged at its Thursday meeting.
Monet Doss, Senior Analyst for Macroeconomics and Financial Services at the company, said: “Inflation came in below our expectations at 14% y/y and we expect average inflation at 14.4% over the remainder of the year, which is higher than the 7% (±2%) target for the fourth quarter of 2022, largely affected by external conditions, and reflects some shortages in products due to lack of local manufacturing and low imports.”
She added: “The Purchasing Managers’ Index in Egypt came at 47 in May, as data indicates a decline in consumer spending, a decline in the volumes of new supply orders at the fastest pace since 2020, and a decline in demand for production inputs as well as the rate of employment and employment.”
“We believe that further interest rate increases will not prove effective in fighting inflation and could backfire by dampening production, leading to further supply shortfalls,” Doss said.
Beltone Financial also expected the MPC to maintain interest rates during its meeting tomorrow, Thursday.
The company’s research department said, in a research note, that it believes that the full impact of raising interest rates on inflation will take time to fully reflect, and expects the Central Bank of Egypt to keep interest rates unchanged during the Monetary Policy Committee meeting tomorrow, to control inflation rates in light of the global instability during the current period, pointing out that the rise in treasury bond yields and the 91-day bills yield reaching an average of 15% supports this vision.
“Egypt’s annual general inflation rose to 13.5% in May, compared to 13.1% in April, down from our expectations of 15%,” Beltone said.
According to Beltone, the annual inflation reading reflects the slowdown in monthly inflation, which rose by 1.1% compared to 3.3% in April, noting that the monthly inflation reading came to reflect a slight increase in food prices by 0.6% compared to 7.6% in April, mainly supported by the decline in prices of vegetables by 15%, compared to an increase of 29.5%.
Beltone expected that general inflation would continue to rise at the annual reading level, with the global rise in commodity prices being reflected on the local market.
This comes as a Reuters poll expected the central bank to raise the interest rate on one-night deposits next Thursday by 50 basis points, as part of its efforts to curb rising inflation.
The average expectations in the poll, which included 17 analysts, was that the Central Bank of Egypt would raise deposit interest rates to 11.75% at the regular Monetary Policy Committee meeting, and they expected the lending rate to rise by an average of 25 basis points to 12.50%.
“In the context of the Fed’s tight policy and pressure on Egypt’s external liquidity, a significant increase in the interest rate from the central bank is needed to recover portfolio flows,” said Pascal Defoe of BNP Paribas GB.
The US Federal Reserve raised interest rates by 75 basis points on 15 June, its largest increase in more than a quarter of a century, as it sought to stem rising inflation.
However, many analysts believe that the bank will leave interest rates unchanged until it becomes clear how previous increases affected inflation.
Mohamed Abu Basha of EFG Hermes said: “The central bank is likely to take a breather at the next meeting, having already risen by 300 basis points in its last two meetings and before some important inflation factors in July and August, including the upcoming quarterly fuel price adjustment.”