Report: Will CBE raise interest rates at its next meeting?

The Research Department of HC Securities and Investment expected the Central Bank of Egypt’s Monetary Policy Committee would raise the interest rate at its next meeting.

“We expect the Monetary Policy Committee to proceed with its tightening policy and raise interest rates by about 200 basis points at its meeting scheduled for Thursday, March 30.

The aim of controlling the increasing inflation rates, which we expect to continue to rise, peaking at 35.9 percent by July, before gradually declining to 30.3 percent by December,” Heba Mounir, macroeconomic analyst at HC Securities and Investment, said.

Mounir expects the inflation figures for March and the coming months to reflect the following:

1- An increase in fuel prices between seven and 11 percent in early March, and an increase in the price of diesel fuel by 20 percent for all industries except for the food and electricity sectors.

2- An increase in household electricity prices from July 

3-The liberation of the price of some basic food commodities such as rice.

4- Shortage in domestic poultry supplies due to problems related to feed prices and its availability, which were affected by the Russian-Ukrainian war.

5- The depreciation of the Egyptian pound by 20 percent year-to-date, as a result of the decline in foreign currency income. A widened gap in liabilities and assets in the banking sector in foreign currency.

As a result of the decline in foreign currency income, the gap in liabilities and assets widened in the banking sector in foreign currency, with net liabilities due by the banking sector, including CBE figures, rising to US$21.6 billion in January 2023 compared to $20.0 billion in December 2022, Mounir said.

Excluding central bank figures, the net liabilities of the banking sector in foreign currencies expanded to $13.0 billion in January, compared to $11.7 billion in December 2022.

Due to the increase in inflationary pressures, and Egypt’s need to maintain attractive investment climate, Mounir expected that the rate of return required by investors on Egyptian treasury bills for the 12-month term will reach 25.18 percent, which reflects the rise in the credit default swap for Egypt for one year to 1,419 compared to at 670 at the beginning of February.

The total investment of foreign investors in Egyptian treasury bills increased by $2.4 billion in December 2022 to $10.4 billion by the end of January 2023.

The latest issuance of treasury bills for a period of 12 months recorded an average return of 19.19 percent (after deducting taxes of 15 percent for US and European investors), which reflected a real yield of -2.31 percent, taking into account an inflation forecast of 21.5 percent in March 2024, which reinforces HC Securities and Investment’s expected increase in interest rates, Mounir added.

“We expect the real yield to turn into a positive yield of 1.33 percent after deducting taxes of 15 percent for foreign investors on their expected return,” she said, predicting an inflation rate of 20.1 percent for April 2024.

On the positive side, deposits not included in official reserves increased for the third month in a row, by 19 percent on a monthly basis to $2.61 billion in February, however, it is still below its level of $9.38 billion recorded in 2022, according to Mounir.

Also, net Foreign exchange reserves for the sixth consecutive month increased by 0.4 percent on a monthly basis to $34.3 billion in February, while it decreased by 16.2 percent on an annual basis.

The Monetary Policy Committee of the Central Bank of Egypt fixed, in its meeting on February 2, 2023, interest rate on deposits and overnight lending at 16.25 percent and 17.25 percent, respectively, after it raised interest rates by 800 basis points during 2022 and by 500 basis points in the fourth quarter separately.

Egypt’s inflation rate accelerated to 31.9 percent year on year in February from 25.8 percent year on year in January, according to Central Agency for Public Mobilization and Statistics data.

As for the monthly change, the monthly prices increased by 6.5 percent on a monthly basis in February 2023 compared to an increase of 4.7 percent.

This will be on a monthly basis in the January, mainly due to a rise in the prices of most food and beverage commodities by 14.4 percent on a monthly basis compared to an increase of 10.1 percent in January 2023.

Globally, the US Federal Reserve raised interest rates on Wednesday by 25 basis points, bringing the total amount of increase since the beginning of the year until now to 50 basis points, after raising interest rates by 425 basis points over the course of 2022.

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