Cairo – The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is forecast to increase the policy rates 100 basis points (bps) based on the country’s current situation in the meeting scheduled 18 May, according to Financial Analyst and Economist at HC Securities & Investment, Heba Monir.

Monir noted that the recent deceleration in Egypt’s inflation rate will be short-lived, expecting inflation to inch up 1% on a monthly basis in May. The projections follow the recent increase in diesel prices and changes in the ration cards system, averaging at 30.2% for the second half (H2) of 2023 according to HC Securities’ numbers.

The financial analyst added: “The banking sector’s net foreign liabilities (NFL), including the CBE, widened to $24.50 billion in March from $23 billion in February, according to CBE data. Excluding the CBE, the banking sector’s NFL widened significantly to $15.60 billion in March from $13.80 billion in February.”

She highlighted that given the pressure on the local currency, Egypt’s one-year certificates of deposit (CDs) reached a record high. Monir elaborated that the current account registered a surplus of $1.41 billion in the second quarter (Q2) of fiscal year (FY) 2022/2023 for the first time in many years against to a deficit of $3.80 billion a year earlier, mainly due to significant import control.

The economist said: “On the other side, the capital and financial account recorded a deficit of $1.63 billion in Q2-22/23, reversing a surplus of $5.38 billion a year earlier, mainly due to a $3.96 billion deficit in the assets of the banking and other sectors compared to a surplus of $2.38 billion a year earlier and net foreign portfolio outflows reached $855 billion in Q2-22/23 bringing these outflows to $3.01 billion in H1-22/23.”

She added that Egypt’s external debt increased by c5% quarter-on-quarter (QoQ) and c12% year-on-year (YoY) to $163 billion in December 2022.

Monir pinpointed: “A 100 bps policy rate hike in the coming meeting could increase the required 12-month treasury bills (T-bills) rate to 27.50%, based on our calculations, due to a significant hike in Egypt’s one-year CDs to 2,510 bps from only 618 at the beginning of the year and a widening in the inflation differential between Egypt and US to 29.10% in Q2-23 from 24.20% in Q1-23, which would translate into a real interest rate of 6.57% based on our calculation (accounting for a 15% tax rate for US and European investors and 16.5% inflation in May 2024) compared to 3.63% currently and 0.50% in the US.”

HC Securities’ Monir concluded: “We believe this could attract carry trade again, especially with the Federal Reserve hinting that are no more hikes expected soon,” adding: “The downside of a rate hike is higher debt servicing costs; however, we see bridging the FX shortage through carry trade as a more urgent priority.”

In the previous MPC meeting, which took place on 30 March 2023, the decision was to increase the interest rate by 200 bps. This followed HC Securities’ predictions of tightening policy rates to tame the increasing inflation.

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