Does the “Central of Egypt” move interest rates in the battle with inflation?

Markets are awaiting the Central Bank of Egypt’s Monetary Policy Committee meeting on Thursday to decide on interest rates.

The Monetary Policy Committee of the Central Bank decided, in its last meeting last June, to keep the overnight deposit and lending rates and the main operation rate at 8.25% and 9.25% for the fifth time in a row.

It also decided to keep the credit and discount rate at 8.75%.

The last change in interest rates in Egypt was last November, when they were reduced by 50 basis points, bringing the total cuts during the past year to about 400 basis points.

In turn, Nouman Khaled, Assistant Director and Macroeconomic Analyst at Arqaam Capital, expected, in an interview with Al Arabiya, that interest rates would be fixed due to the rise in fuel prices locally and globally, and therefore, in addition to expectations of a rate cut in the last two meetings of this year.

Regarding inflation, Khaled said that imported inflation is concentrated in fuel prices because it is affected by international prices, ruling out the presence of imported inflation that has a greater impact than hydrocarbons.

For its part, the Research Department of HC Securities and Investment expected that the Central Bank of Egypt would keep interest rates unchanged at its meeting scheduled to be held next Thursday, August 5.

And the senior analyst of the macroeconomics and financial services sector at HC, Monet Doss, expected that the inflation rate during the month of June would reach the level of 0.8% on a monthly basis, and 5.6% on an annual basis, within the target range of the Central Bank of Egypt at 7%. (+/- 2%) for the fourth quarter of 2022.

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However, HC expects treasury bill yields to remain resilient at current levels as foreign flows into Egyptian treasury bills remain essential to support Egypt’s net international reserves, given the slow recovery of tourism.

She pointed out that the net foreign assets of the Egyptian banking sector (excluding the Central Bank) fell to 1.69 billion dollars last May from 3.38 billion dollars in the previous April. Doss said: “This is a weak level, as the banking sector resorts to its foreign assets to finance the exit of foreign capital from the Egyptian debt market in the event of external or internal economic shocks.”

On the other hand, companies in Egypt are currently borrowing at an average interest of 8.75%, while the one-year treasury bills achieve an after-tax rate of 10.6%. It is expected that the current rate cut will lead to an increase in the risk-free rate above the corporate lending rate.

HC suggested that the Monetary Policy Committee would keep the interest rate unchanged at its next meeting. In addition, Egypt faces high competition from Turkish T-bills, which currently offer a real yield of 5.5% (calculating zero percent taxes and Bloomberg’s Turkish inflation forecast of 13.4% and a yield of 18.9% on one-year T-bills) with a 5-year credit risk swap. years in US dollars at 388 basis points.

Egypt offers a real rate of 3.8% (by calculating 13.3% on Egyptian 12-month treasury bills and calculating 15% tax on treasury bills imposed on American and European investors and our inflation forecast at 7.5% for the next year) with a 5-year US dollar credit risk swap at 362 basis point.

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It is worth noting that the Monetary Policy Committee of the Central Bank of Egypt kept the interest rate unchanged in its last meeting for the fifth time in a row. The Egyptian annual inflation escalated to reach 4.8% in May, with monthly inflation achieving a rise of 0.7%, compared to an increase of 0.9% in April, according to data recently published by the Central Agency for Public Mobilization and Statistics in Egypt.