HC expect CBE to leave interest rates unchanged

HC expect the MPC to leave interest rates unchanged at its upcoming 20 February meeting and delay rate cuts as these factors could pressure Egypt’s foreign currency inflows, considering its external debt dues and energy import bills*

Financials analyst and economist at HC, Heba Monir commented:Egypt's external position witnessed a minor deterioration with: (1) the 1Q24/25 Balance of Payments (BOP) turning into an overall deficit of USD991m from a surplus of USD229m, (2) the banking sector's net foreign asset (NFA) position narrowing by c12% m-o-m to USD5.23bn in December, while banks excluding CBE widened their net foreign liability (NFL) position by c10% m-o-m for the fifth consecutive month to USD6.42bn, and (3) Egypt’s external debt increasing by 1.52% q-o-q to USD155bn in 1Q24/25. On the positive side, signs of improvement include: (1) net international reserves (NIR) increasing by USD156m m-o-m in January 2025 to USD47.3bn from USD47.1bn in December 2024, and deposits not included in official reserves increasing by USD222m m-o-m to USD10.17bn in January, (2) Egypt's 1-year CDS declining to 332 bps in January 2025, from 379 bps in December 2024, and (3) the PMI index surpassing the neutral mark and recording 50.7 in January, indicating improved business conditions for Egypt’s non-petroleum sectors. Regarding inflation, January’s reading came higher than our estimate of 22.8% and higher than the Reuters consensus median of 23.0%. As for the recent T-bills auctions, yields on the shorter maturity, mainly 3M T-bills, started to pick up again slowly, rising by 59 bps y-t-d to 27.5% in the latest auction. Thus, given the tightened external position and the turbulent geopolitical tension and its effect of a potentially delayed recovery of the Suez Canal revenues and the U.S. declaration of potentially displacing Gaza’s residents in several countries, including Egypt, we expect the MPC to leave interest rates unchanged at its upcoming 20 February meeting and delay rate cuts as these factors could pressure Egypt’s foreign currency inflows, considering its external debt dues and energy import bills, creating a need to maintain the attractiveness of the carry trade.

It is worth mentioning that in its 26 December 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, for the sixth consecutive times, after it hiked them by 600 bps in March 2024, bringing total rate hikes to 1,900 bps since it started its tightening policy in 2022. Egypt's annual headline inflation decelerated to 24.0% y-o-y in January 2025 from 24.1% y-o-y in December 2024, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.5% m-o-m in January compared to a 0.2% m-o-m increase in December. On the global front, on 29 January, the U.S. Federal Reserve maintained the target range for the federal funds rate at 4.25-4.50%, leaving the total cuts at 100 bps after it hiked rates by 525 bps since it started tightening policy in 2022, while the European Central Bank (ECB) lowered the key ECB interest rates for the deposit facility, the main refinancing operations and the marginal lending facility by 25 bps on 30 January to 2.75%, 2.90% and 3.15%, respectively, bringing total cuts to 125 bps, since it started cutting rates in June 2024 after it hiked rates by 450 bps since it started its tightening policy in 2022.