The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its fifth periodic meeting in the current year on Thursday to decide the basic interest rates, which are the most prominent indicator of the Egyptian pound's interest rates in the market in the short term. The meeting comes amid strong expectations of "no change" for the third time in a row, despite the Central Bank's earlier announcement that the inflation rate would increase to a record level in June 2023, while the market is awaiting the disclosure of new inflation rates of July, next week. The MPC decided on 22 June 2023 to maintain the basic rates with the Central Bank at 18.25% for deposits, 19.25% for lending, and 18.75% for the credit and discount rates and the main operation with the Central Bank, for the second time in a row after those prices were raised 2% on 30 March, and 8% in 2022. The committee confirmed at the time that it would continue to evaluate the impact of the restrictive monetary policy that was taken and its impact on the economy according to the data received during the coming period, pointing out that the path of the basic interest rates at the Central Bank depends on the expected inflation rates and not the prevailing inflation rates. The basic consumer price index, prepared by the Central Bank, recorded a monthly rate of 1.7% in June 2023, compared to a monthly rate of 1.2% in the same month of the previous year, and a monthly rate of 2.9% in May 2023. The Central Bank revealed that the annual core inflation rate, prepared for its part, had risen to 41% by the end of June 2023, compared to 40.3% in May 2023. The general urban consumer price index, announced by the Central Agency for Public Mobilization and Statistics, recorded a monthly rate of 2.1% in June 2023, compared to a negative rate of 0.1% in June 2022, and a rate of 2.7% in May 2023. The annual general inflation rate recorded 35.7% in June 2023, compared to 32.7% in May 2023. The Central Bank of Egypt targets an inflation rate of 7% ± 2% on average during the fourth quarter of 2024 and 5% (±2%) on average during the fourth quarter of 2026. The Central Bank confirmed earlier that it will continue to follow economic developments and expectations in the next stage, and will not hesitate to use all available monetary policy tools, including liquidity management operations, with the aim of maintaining restrictive monetary conditions, and to achieve target inflation rates. HC Securities and Investment expected that the Monetary Policy Committee of the Central Bank of Egypt would keep interest rates unchanged in its meeting tomorrow, Thursday. A report issued by the company's research department indicated that inflation escalated for the second month in a row, recording 35.7% on an annual basis last June, up from 32.8% in May on an annual basis, according to data issued by the Central Agency for Public Mobilization and Statistics, and monthly prices increased by 2.08%. % on a monthly basis in June compared to 2.72% in the previous month. On the global front, the US Federal Reserve raised interest rates on Wednesday by 25 bps to a range of 5.25-5.30%, a total of 100 bps y-t-d and 425 bps in 2022. Based on Egypt's current economic situation, we present below our expectations for the likely outcome of the MPC meeting. Heba Mounir, economist and financials analyst for HC Securities and Investments, stated: "We expect Egypt's inflation to continue rising by 2.0% m-o-m and record 36.6% y-o-y for July 2023 as the supply shortages, caused by the curbing of importation and lack of USD availability, continue to lead to inflation spikes. The curbing of importation, along with an improvement in tourism numbers, has led Egypt's overall balance of payment (BoP) in 1Q22/23 and 2Q22/23 to record surpluses of $523m and $75.6m, respectively; however, it reversed into a deficit of $317m in 3Q22/23 due to c17% q-o-q lower exports impacted by the drop in natural gas and petroleum products prices and a c46% q-o-q drop in the services balance surplus. On a more positive note, the Egyptian Cabinet announced selling assets worth $1.65bn in July (paid in FX), and the New Urban Communities Authority (NUCA) sold land to foreigners worth $2bn in 1H23. Also, net international reserves (NIR) increased by 4.29% y-o-y and 0.42% m-o-m up to USD34.8bn in June, and deposits not included in the official reserves increased by c19% m-o-m and 4.96x y-o-y to $4.37bn in June. As a result, Egypt's 1-year CDS retreated to 867 from 1,221 in the previous month. The USD shortage has led Egypt's banking sector net foreign liabilities (NFL), including the CBE, to widen by 1.2% m-o-m and c48% y-o-y to $24.4bn in May 2023, and the two largest public banks, Banque Misr and the National Bank of Egypt (NBE) started issuing two types of USD certificates of deposits (CDs), including 3-year CDs at 7% annual interest and 3-year CDs at 9%, with a cumulative EGP return paid in advance, to improve the FX liquidity. If the Egyptian government accelerates its partial asset sale program and the USD CDs attract enough depositors, this should ease the USD shortage. Regarding the carry trade, despite the 12M T-bills rates increasing 5.19 pp y-t-d to 24.095%, we estimate that it offers a real negative yield of 6.41%, as evidenced by a net foreign portfolio investments outflow of $3.43bn in 9M22/23. This suggests that an interest rate hike to attract portfolio inflows is unlikely in the upcoming MPC meeting until Egypt sorts out its USD liquidity shortage, which led inflation to soar and widened the Egypt-US inflation differential to 32.0% in 3Q23 from 29.2% in 2Q23. The high-interest rate environment has also led to an inverted yield curve. Accordingly, and based on Egypt's current economic situation, we believe the MPC committee will likely maintain interest rates unchanged at its 3 August meeting. A Reuters poll also showed that the Central Bank of Egypt is expected to keep interest rates unchanged at its monetary policy meeting tomorrow, Thursday, even after inflation reached a record level in June 2023. An average of 16 analysts surveyed expected the bank to keep the interest rate on deposits at 18.25% and on lending at 19.25%, while only one analyst expected the bank to change interest rates and raise them by 100 basis points. "We expect the Central Bank of Egypt to keep key interest rates unchanged at its meeting on 3 August, and to raise interest rates by 200 basis points at its meeting on 21 September," said Callie Davis of Oxford Economics. Davis expects inflation to rise between 36% and 40% on an annual basis through September.
