Several analysts expect the Central Bank of Egypt to leave interest rates unchanged at the Monetary Policy Committee meeting scheduled for Thursday, but some forecast an increase of up to two percentage points before year-end if inflation risks intensify under pressure from fuel prices, oil prices and import costs.
The forecasts come after the central bank paused its monetary easing cycle last April and kept interest rates unchanged for four consecutive meetings through August, leaving overnight deposit and lending rates at 19% and 20%, respectively.
Inflation and fuel-price outlook
Mostafa Shafie, head of research at Astool Holding, expects rates to remain unchanged at Thursday’s meeting, but believes the Monetary Policy Committee’s stance could change at its following meeting once the impact of any fuel-price adjustment becomes clear and the latest inflation reading is released.
Shafie expects interest rates to rise by between 1.5% and 2% at the November meeting, with the increase potentially split across two meetings at one percentage point each. He also expects a fuel-price adjustment to push inflation into a range of 15% to 16%, and possibly close to 17%, depending on the size of the increase and how much of its impact is passed through to transport and production costs and the prices of goods and services.
Economist Wael el-Nahhas also expects rates to remain unchanged at the next meeting, with a later increase possible if oil prices continue to rise and feed through into energy costs and domestic prices. He said oil prices exceeding $105 a barrel, compared with $75 assumed in the state budget, would place additional pressure on public finances, estimating that every $1 increase in the price of a barrel would cost the country’s budget about 4 billion Egyptian pounds.
El-Nahhas expects fuel prices to rise by 10% next month, potentially pushing inflation up by about 2.5 percentage points to 17% and narrowing the real interest-rate margin. He expects rates to rise by about one percentage point in October, and possibly to 20% if inflation reaches that level.
Forecasts point to a rate hike at the next meeting
By contrast, Heba Mounir, a macroeconomics analyst at HC Securities and Investment, expects a rate increase of about 100 basis points at Thursday’s meeting. She forecasts monthly inflation of 1.3% in September and 2.1% in October, driven by housing and utility costs and the start of the academic year, along with an expected increase of about 10% in diesel and gasoline prices.
Financial-markets expert Haitham Fahmy expects rates to rise by about 50 basis points at the next meeting to preserve the Egyptian pound’s appeal against the dollar, following the Federal Reserve’s interest-rate hike. He added that investors had demanded higher yields on pound-denominated debt instruments, with the average weighted yield on one-year Treasury bills reaching about 25.77% before tax, while the cost of insuring sovereign debt rose to 275.7 points.
Fahmy estimates that the cumulative increase in interest rates could reach about 100 basis points by year-end if inflationary pressures worsen during the remainder of the year.
Exchange rates and capital flows
Mostafa Badra, a professor of finance and investment, said keeping interest rates unchanged remained the most likely scenario for the next meeting, noting that regional developments could affect monetary-policy decisions and interest-rate expectations.
El-Nahhas said exchange-rate stability and preventing hot-money outflows were two key factors in the central bank’s calculations. Shafie said US monetary-policy moves affect capital flows and the appeal of debt instruments in emerging markets, forecasting that continued US rate increases at upcoming meetings, at rates ranging from 0.5% to 0.75%, would place additional pressure on those markets, including Egypt.
In monetary-policy reports issued after rate meetings, the central bank says it seeks to maintain a sufficiently positive real interest-rate margin, while assessing its policy stance based on economic developments, the drivers of inflationary pressures, the expected inflation path and the balance of risks.
