No Budging on Egypt Rates as Capital Returns: Decision Day Guide

The slowest Egyptian inflation in nearly a year probably wont prompt an interest-rate cut Thursday, as the central bank seeks to maintain the attractive yields that brought back billions of dollars in debt investment this summer.

The focus remains on keeping capital inflows high even after an easing in August consumer prices cemented Egypt‘s real rate among the world’s highest. All but one of 11 economists surveyed by Bloomberg predict the central bank will hold its benchmark deposit rate at 9.25%, prolonging a pause in place since a cut of 300 basis points in March.

“The argument for a cut is clear and strong,” said Simon Williams, HSBC Holdings Plcs chief economist for Central and Eastern Europe, the Middle East and North Africa. “But with at least half an eye on the currency, the central bank seems determined to keep real rates very high.”

The coronavirus pandemic has cut into Egypts main sources of foreign currency, including Suez Canal receipts and tourism. Income from foreign visitors fell 11% in the first quarter of 2020.

That‘s made luring capital more of a priority. After Egypt’s biggest-ever outflows between March and May as part of a global sell-off, foreign investors began to return in June after Egypt secured financing from the International Monetary Fund.

Foreign holdings of local debt jumped to $16.9 billion by end of August from $14.1 billion a month earlier.

Read More: IMF Approves $5.2 Billion Stand-By Arrangement for Egypt

“The central bank will try to continue to attract capital inflows during a period of high global uncertainty, but lower than expected inflation has increased the chances of a cut soon,” said Farouk Soussa, an economist in London at Goldman Sachs Group Inc. “Our conviction in the hold call is diminishing.”

Annual inflation in urban parts of Egypt slowed to 3.4% in August. Governor Tarek Amer said on Sept. 7 that he expected price growth to average 6.2% in the last quarter of 2020.

A decision this week by state-owned National Bank of Egypt and Banque Misr to cancel their 15% certificates of deposits may mark “the beginning of monetary policy normalization” after the pandemic, according to Ahmed Hafez, head of research for the Middle East and North Africa at Renaissance Capital.

“Although inflation is likely to increase to 7% next year, theres still room for the central bank to cut rates between 50 to 100 basis points while maintaining the attractiveness of local debt,” Hafez said.

— With assistance by Netty Idayu Ismail, and Harumi Ichikura