HC: We expect the MPC to leave interest rates unchanged at its upcoming meeting

In light of Egypt’s macro economy developments and the geopolitical tensions, HC Securities & Investment expects the CBE to leave the interest rates unchanged in its upcoming meeting scheduled November 21, 2024

Financials analyst and economist at HC, Heba Monir commented: “Egypt’s external position remains stable while reflecting improvement, (1) with net international reserves (NIR) increasing by USD205m m-o-m in October to USD46.94bn from USD46.737bn in September, (2) the banking sector net foreign assets (NFA) position increasing by 6.0% m-o-m to USD10.3bn in September, reversing a net foreign liability (NFL) position of USD26.8bn a year earlier, and (3) Egypt’s 1-year CDS dropping to 349 currently, from 857 bps on 1 January. On the economic activity front, the PMI index rose slightly to 49.0 in October, 48.8 in September, recording below the 50.0 neutral, signaling that the non-petroleum sector in Egypt is still not growing. However, the sub-components to the PMI offered a mixed picture, with only the Output and New Orders indices keeping the headline measure below the neutral mark. And although October’s inflation of 26.5% came lower than our expectation of 28.5% despite the government increasing gasoline prices by c11–13%, and diesel prices by c17%, in mid October, we expect inflationary pressures to persist as November is expected to capture the full effect of the energy price increase. We also see Egypt’s carry trade as still attractive given no expected sizable EGP devaluation until year-end and in 2025 and our estimate of positive real interest rate of 2.9% on Egypt’s latest 12-month average T-bill rate of 26.241%, net of 15.0% tax on US and UK investors and factoring in our inflation estimate one year from now of 19.4%. So, given the inflationary pressures and Egypt’s expected external debt repayment in November of around USD4bn based on news flow and its repayment of USD1bn of its dues to foreign oil companies in November, we expect the MPC to leave interest rates unchanged at its upcoming 21 November meeting.”

It is worth mentioning that, in its 17 October meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024. Egypt’s annual headline inflation inched up to 26.5% y-o-y in October from 26.4% y-o-y in September, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.1% m-o-m compared to a 2.1% m-o-m increase in September. On the global front, on 6 November, the US Federal Reserve cut the federal funds rate by 25 bps to 4.50-4.75, bringing total cuts to 75 bps after it hiked rates by 525 bps since it started its tightening policy in 2022. Also, the European Central Bank (ECB) lowered the key ECB interest rates for the main refinancing operations, the marginal lending and deposit facility by 25 bps in October to 3.40%, 3.65% and 3.25%, respectively, bringing total cuts to 75 bps, after it hiked rates by 250 bps since it started its tightening policy in 2022. Based on Egypt’s current economic situation, we present below our expectations for the possible outcome of the 21 November MPC meeting.