Egypt’s Central Bank meets on Thursday. Will it surprise markets again?

The meeting comes on the heels of inflation reaching historic levels
Egypt’s Central Bank meets on Thursday. Will it surprise markets again?
Egyptian note

As living conditions continue to deteriorate and inflation rises, the Central Bank of Egypt (CBE) will meet on Thursday to discuss the possibility of approving a new rate hike.

The first meeting of the Central Bank’s Monetary Policy Committee, which met on February 2, decided to maintain the overnight deposit and lending rates and the central bank’s main operation rate at 16.25 percent, 17.25 percent, and 16.75 percent, respectively. The credit and discount rate was also maintained at 16.75 percent.

Will this remain the same at Thursday’s meeting or will an increase be approved?

The picture remains blurry, with analysts’ expectations varying between an increase of 100 basis points and 200 basis points. Others are betting that the central bank will fix interest rates for this month as well. An increase of 300 basis points is not excluded.

Morgan Stanley noted that last month’s record inflation figures and mounting pressure on the pound support the prospect of a rate hike of at least 200 basis points this month.

Read: UAE, Kuwait extend maturity of $2.65 bn in deposits to Egypt

Egypt’s annual core inflation rate rose to a historic high in February to 40.3 percent. This is the highest level recorded by the index since its launch in 2009. Monthly core inflation jumped 8.1 percent during the same month.

Morgan Stanley expects the Central Bank of Egypt to raise interest rates by 400 basis points to 20.25 percent by July.

The US investment bank believes that monetary policy alone will not be able to get Egypt out of the foreign exchange crisis, pointing to the importance of accelerating plans related to the privatization program to provide dollar liquidity within the structural reform program in parallel with the flexible exchange rate.

Analysts polled by Reuters expect Egypt’s central bank to raise interest rates by 200 basis points at Thursday’s meeting to curb high inflation.

In light of this reality, many analysts expect some banks affiliated with the Egyptian government to announce the issuance of new investment certificates with a huge high yield, after the meeting of the Monetary Policy Committee, following the expiration of certificates with an 18 percent yield on March 22.

They argue that the central bank’s interest rate hike will encourage banks to issue high-yield certificates.

Government banks, such as the National Bank of Egypt and Banque Misr, offered investment certificates with an 18 percent yield after the EGP exchange rate was liberalized on March 19 last year.

The proceeds of these certificates amounted to about 750 billion pounds, which banks continued to issue until the end of May last year.

In January, these two banks introduced a new one-year savings certificate with 25 percent interest paid at the end of the term or 22.5 percent interest paid monthly, the highest interest rate in the Egyptian banking sector.

The aim behind the issuance of these certificates is to absorb excess liquidity and ensure that it does not exit the banking system.

Amid this bleak landscape for the Egyptian economy, Egypt’s sovereign wealth fund is racing against time to implement plans to qualify a number of government assets and companies to be offered to participate with investors, as part of a plan aimed at injecting tens of billions of foreign exchange into the Egyptian economy.

The Fund also seeks to launch a number of specialized sub-funds during the current year, including the “Green Fund”, which works on clean energy, hydrogen, and green ammonia projects.

The Egyptian government has begun the procedures for offering the two companies, “National Company for the Sale and Distribution of Petroleum Products” and “National Company for the Production and Bottling of Natural Water for Investors”, which are affiliated with the National Service Projects Organization of the Armed Forces.

At the beginning of March, the Official Gazette published a presidential decision to transfer the entire ownership of Misr Insurance Holding Company to Egypt’s sovereign wealth fund.

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