Egypt - The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its first regular meeting of the year on Thursday to decide on the central bank’s key interest rates, which serve as the main indicator for the short-term direction of the pound’s interest rate.

The MPC meeting comes amid significant uncertainty about the expected decision, considering the intense disruption in the Egyptian market, affecting both the exchange rate and the commodity prices. This is in contrast to the slowdown in inflation over the past months.

In its last meetings in 2023, held just before the end of December, the MPC decided to keep the central bank’s key interest rates unchanged for the third consecutive time at 19.25% for deposits, 20.25% for lending, and 19.75% for credit, discount rates, and the central bank’s main operation. This followed an 11% increase during 2022 and 2023.

The MPC is scheduled to hold eight meetings during 2024 to discuss the fate of the pound’s interest rate, starting with the first one on Thursday, 1 February, then on 28 March, 23 May, 18 July, 5 September, 17 October, 21 November, and 26 December.

In its previous meetings, the MPC reiterated that the path of the central bank’s key interest rates depends on the expected inflation rates, not the current inflation rates.

The CBE revealed that the annual core inflation rate dropped to 34.2% in December 2023, compared to 35.9% in November 2023. The headline Consumer Price Index (CPI), on the other hand, averaged 1.3% in December 2023, compared to 2.6% in December 2022, and 1% in November 2023. The Central Agency for Public Mobilization and Statistics (CAPMAS) also revealed that the annual inflation rate in Egyptian urban areas declined for the third consecutive month, reaching 33.7% at the end of December 2023, compared to 34.6% in November.

CAPMAS stated that the overall CPI for the Republic reached 194.2 points in December 2023, reflecting an annual inflation rate of 35.2%, compared to 36.4% in November 2023.

CAPMAS added that the monthly inflation rate for the entire Republic was 1.2% in December 2023, compared to 0.9% in November 2023.

The market is eagerly awaiting the release of the latest inflation divs with both general and core indices on February 10, the pre-scheduled date for announcing monthly inflation divs.

A document prepared by the Information and Decision Support Center of the Cabinet stated that the monetary policy of the CBE will focus on achieving price stability and reducing inflation rates to targeted levels within the framework of an inflation-targeting policy. It aims to reach 7% (±2%) on average during the fourth quarter of 2024 and continue to reduce it to 5% (±2%) on average during the fourth quarter of 2026. The goal is to maintain it at low levels not exceeding 5% by 2030.

The document projected that the inflationary pressures facing the Egyptian economy will start to ease from 2024, expecting an average inflation rate of around 9.2% during the period 2024-2028. It stressed the need to control the expansion levels in the money supply, linking it to the recorded increases in real GDP growth rates at constant prices. This is aimed at containing inflationary pressures driven by exceeding the rates of economic growth.

The CBE aims to reduce inflation to 7% (±2%) on average during the fourth quarter of 2024, and further decrease it to 5% (±2%) on average during the fourth quarter of 2026. The CBE stated that it will use all available monetary policy tools to maintain restrictive monetary conditions and reduce monthly inflation rates, guide the annual inflation rates towards the targets, and achieve price stability over the medium term.

The CBE will hold eight meetings during 2024 to decide on the interest rates, starting with the first one on Thursday, 1 February, then on 28 March, 23 May, 18 July, 5 September, 17 October, 21 November, and 26 December.

On the economic front, H.C. Securities & Investment expects the CBE to keep interest rates unchanged in its upcoming meeting, given the current situation in Egypt. Heba Moneer, the company’s macroeconomics analyst, said they expect the CBE to maintain deposit and lending interest rates at the current levels, with no change in the official exchange rate. However, they do not rule out a rate hike if the exchange rate changes, possibly coinciding with the completion of the delayed first and second reviews by the International Monetary Fund (IMF). This may also come with an agreement with the IMF on doubling the value of the Extended Fund Facility, which amounts to $3bn, if not more.

Regarding inflation, Moneer expects the inflation rate for January to rise by 6.7% monthly and 36.3% annually, due to the increase in metro ticket prices, internet and communication services, and household electricity prices. She noted that the interest for one-year Treasury bills was 27.7% last Thursday, reflecting a real negative interest rate of 9%.

However, she doesn’t see the real negative return affecting the CBE’s decision, as international credit rating agencies have downgraded Egypt’s credit rating, and Egypt has been excluded from the J.P. Morgan bond index starting from 31 January. This reduces the chance of hot money returning before exchange rates stabilize.

A Reuters poll suggests that the CBE is likely to keep interest rates unchanged in its monetary policy meeting on Thursday, amid ongoing talks with the IMF team in Cairo. The average expectations of 16 analysts indicate that the CBE will keep deposit interest rates unchanged at 19.25% and lending interest rates at 20.25% in the regular meeting. Six analysts expect an increase ranging from 100 to 300 basis points.

Analysts suggest that a sharp increase in interest rates is likely if the currency is devalued. Mohamed Abu Basha from Hermès Financial Group said that the CBE’s decision depends on the outcome of discussions with the IMF, making it hard to predict what will happen.

Simon Williams from HSBC Bank said that favourable core effects indicate a slowdown in the average annual inflation rate in Egyptian cities, which was 33.8% last year. This lowers the possibility of raising interest rates, especially with signs of economic growth slowdown. He expects January data to show a drop in the annual inflation rate by more than 4%, due to the end-of-the-base-year effect of the currency devaluation in the first quarter of 2023.

Williams added: “We still expect the CBE to raise interest rates only if the currency is devalued.”

Farouk Sousa from Goldman Sachs said that a 300 basis points interest rate hike would send a positive message about Egypt’s intentions and pave the way for an agreement with the IMF. In a note, he wrote, “Significant tightening in monetary and fiscal policy, including spending on state-led projects, is likely at the heart of the IMF-supported policy agenda.”

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