Yesterday, on March 20, the Central Bank of Egypt (CBE) canceled the upcoming Monetary Policy Committee (MPC) meeting which was set to be held on March 28. According to a press release, the CBE stated it had done enough at its special meeting held on March 6 when it hiked key interest rates by 600 basis points (or 6%).
JPMorgan was wrong: On March 11, JPMorgan predicted that Egypt’s CBE might increase its interest rate by another 2% later in the month due to indications of skyrocketing inflation following a significant currency depreciation. But that didn’t happen…
But the experts called it: All the experts we polled were right and agreed the CBE wouldn’t hike interest rates further after the 6% hike on March 6. But why? What about accelerating inflation? We interviewed them, but before we get to it, here are the experts:
- Mona Bedair, Chief Economist at Al Baraka Bank Egypt
- Hani Amer, Co-Head of Research at Arab African International Securities
- Ahmed Abdelnaby, Head of Research at Mubasher Trade Egypt
- Amr Hussein Elalfy, Chief Equity Strategist at Rumble
- Ahmed Abou El-Saad, Head of Regional Asset Management at Azimut for the Middle East, North Africa & Turkey; and Board Member at the Egyptian Stock Exchange
What about the surging inflation?
It surprised us last February when the urban inflation rate climbed to an annual 35.7% from 29.8% in January according to CAPMAS.
Isn’t hiking interest rates the answer? It tends to slow down inflation by reducing consumer spending and investment, as higher borrowing costs discourage borrowing and spending. Additionally, as inflation rises, depositing money in banks, such as in certificates of deposits (CDs), yields higher returns, making such investments more appealing to investors. This decrease in economic activity lowers the demand for goods and services, alleviating inflationary pressures. Additionally, higher interest rates can attract foreign investment, leading to a stronger domestic currency and thus lower import costs, further dampening inflationary trends.
Well, it’s too soon, all experts agreed. In 2024 alone, the CBE hiked interest rates by 8% over two MPC meetings. The second hike was a hefty 6% on March 6. It’ll take time to materialize and have an impact that can be evaluated.
Most experts think inflation will decline in March, although slightly, without an interest rate hike.
- Why it shot up: Bedair attributes February’s unexpected inflation surge to the pre-Ramadan increase in food prices — amplified by an FX liquidity crunch and resulting raw material shortages — alongside the local currency’s depreciation to 70 EGP/USD on the parallel market, impacting various sectors.
- Stability in sight: Bedair expects prices to stabilize in March, though. Why? Well, for starters, Ramadan’s seasonal effects will have diminished. But also, the CBE shifted the EGP to a flexible exchange rate regime and raised interest rates by 6% on March 6. This was made possible due to improved FX liquidity and helped stabilize the exchange rate.
- It’s not pressing: Abou El-Saad shares Bedair’s view, noting February’s inflation increase driven by the US dollar reaching EGP 70 on the parallel market. With the dollar now at around EGP 50 following the Central Bank’s decision, inflation is expected to stabilize and decrease in March. He mentions the impact of this adjustment on customs and suggests less urgency for interest rate hikes in March.
- But not all agreed inflation would cool off in March, since Abdelnaby said that inflation would remain at the same high level as in February, largely due to the seasonality effect of Eid al-Fitr. Elalfy, on the other hand, forecasts it will increase by 0.4% MoM. He attributes this forecast to a moderate increase in some items offset by lower prices among others on a month-on-month basis.
What’s next: Abou El-Saad anticipates a pause in interest rate hikes to allow the CBE space to evaluate the market’s response to the previous rate increases, with a decision on further hikes likely postponed until May. Abdelnaby echoed this and added that he expects an interest rate hike by 2% later than March to curb the money supply and extra liquidity.
