- We at Fitch Solutions have revised our monetary policy outlook for Egypt as we now expect the CBE to leave the lending and deposit rates at their current levels, at 9.25% and 8.25% respectively, after previously having expected a cut.
- Indeed, during its April monetary policy meeting, the CBE struck a less dovish tone than previously, acknowledging the global recovery albeit noting the uneven pace, while highlighting that inflation has been trending upward; we believe inflation will return within CBE’s target band in 2021.
- Lastly, we believe the CBE will want to preserve Egypt’s competitive advantage of having the highest real policy rate in the world, in order to continue attracting foreign capital and supporting the exchange rate.
We at Fitch Solutions have revised our monetary policy outlook for Egypt, and now expect the Central Bank of Egypt (CBE) will remain on hold in 2021, after having previously expected further easing. During its April 28 meeting, the monetary policy committee (MPC) decided to maintain Egypt’s main interest rates unchanged; the overnight deposit rate was held at 8.25%, the overnight lending rate at 9.25% and the rate of the main operation at 8.75%. In addition, the MPC highlighted several factors that suggest it is unlikely to continue easing this year, after having cut the rates by 400bps in 2020. It acknowledged the global economic recovery, albeit at an uneven pace, and highlighted signs that the Egyptian economy was recovering 'towards pre-pandemic levels'. However, the CBE noted that inflation has been rising on the back of international food and other commodity prices, and remained confident it will achieve its price stability mandate with inflation coming within its target bands (7.0% +/2.0 percentage points).
Inflation Returning To Target Band Limiting Impetus For Easing
Egypt - Consumer Price Index, % y-o-y; Deposit Rate & Lending Rate, %
Source: Bloomberg, Fitch Solutions
We expect that inflation will return to the CBE’s target band, averaging 5.1% in 2021 and 5.5% in 2022, limiting impetus for further easing. In March 2021, inflation came at 4.5% y-o-y, and while it has been a bumpy recovery, it is higher than the low of 3.4% recorded in August 2020. We expect a slow but steady rise in inflation given underlying growth dynamics, especially from a domestic perspective. Egypt is currently facing a third wave of Covid-19 infections and Egypt’s Presidential Adviser for Health Affairs Mohamed Awad Tageldin warned that new lockdown restrictions are looming on the back of this third wave, which could limit inflation’s upside in the short term. The relative stability of the Egyptian pound against the US dollar will also prevent from a sharp increase in imported inflation, Egypt being a net-importing country. Overall, with an improving global economic outlook and rising commodity prices, inflation will gradually drift higher within CBE’s targets bands. That said, we do not expect inflation to rise beyond CBE’s target bands, forecasting inflation to average 5.3% between 2022 and 2024, which underscores our view for rates to be kept at current levels over the foreseeable horizon.
Preserving Attractive Real Rates To Offset Decline In Tourism Revenue
Egypt – Real Policy Rate, %
Source: MoF, Bloomberg, Fitch Solutions
Lastly, we believe the CBE will want to preserve Egypt’s competitive advantage of having the highest real policy rate in the world, in order to continue attracting foreign capital and supporting the exchange rate. With a real policy rate of 3.75%, Egypt holds the highest real rate in the world (see chart above). We expect this real rate to remain elevated thanks to the favourable inflation outlook. High real rate and a stable currency outlook, alongside ongoing business friendly reforms, will continue to attract foreign investors (with a mix of foreign direct investments and portfolio inflows). At the same time, foreign inflows will offset one fundamental weakness of Egypt, namely its current account deficit. Inflows allow Egypt to finance the current account deficit in FY2020/21 that we expect to widen slightly, on the back of a fall in tourism receipts.
Risk To Outlook
The balance of risks to our outlook is tilted to the downside, suggesting that, while not our core view, there is still some risk of easing by the CBE. Surging Covid-19 cases in Egypt, and global travel restrictions, combined with risks of slower-than-expected vaccine rollouts across the globe puts Egypt’s tourism sector at risk, and could also exert downside pressure on inflation. If inflation were to print below CBE’s target bands, the MPC would likely decide to cut rates.
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