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Egypt expected to raise policy rates – HC Securities

Egypt expected to raise policy rates – HC Securities
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Cairo – Mubasher: HC Securities & Investment projected that the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will continue to tighten policy rates by around 200 basis points (bps) in its 30 March meeting to tame increasing inflation rates, Financials Analyst and Economist at HC, Heba Monir, stated.

Based on Egypt’s current situation, HC Securities expects the CBE to increase the policy rates while the inflation rates are forecast to continue rising, peaking at 35.9% by July, before falling to 30.3% by December this year.

Monir said: “We anticipate that March and the coming months' inflation figures will reflect the early March c7-11% increase in octane gasoline prices and the c20% increase in heavy fuel oil (mazut) prices for all industries except food and electricity generating sectors, the expected increase in household electricity effective 1 July, the recent liberalisation of the prices of essential food commodities like rice, the shortage in local poultry supply due to problems related with animal feed prices and availability affected by the Russia-Ukraine war, and the continuing EGP devaluation which reached c20% y-t-d.”

As a result of the USD shortage, Egypt’s banking sector net foreign liabilities (NFL), including the CBE, soared to $21.60 billion in January 2023 from $20 billion in December 2022. Excluding the CBE, the banking sector's NFL also surged to $13 billion from $11.70 billion.

The Financials Analyst added: “In light of the inflationary pressures, the USD shortage, and Egypt’s need to keep the carry trade attractive, we calculate a required 12M [treasury bills] T-bills rate of 25.18%, which considers soaring Egypt’s one-Year [certificates of deposit] CDS to 1,419 from 670 at the beginning of February.”

Monir noted that foreign holdings in Egyptian T-bills jumped by $2.40 billion to $10.40 billion by the end of January 2023 from December 2022. The latest 12M T-bills auction recorded an average yield of 19.19%, accounting for a 15% tax rate for US and European investors, which offers a real yield of negative 2.31%, given HC Securities’ inflation expectation of 21.5% in March 2024, solidifying our view of a needed increase in policy rates.

She added: “We estimate the real yield to turn to a positive 1.33% based on our calculated required after-tax 12M T-bill rate and expected inflation of 20.1% for April 2024.”

The Economist concluded: “On a more positive note, deposits not included in the official reserves increased for the third consecutive month, increasing in February by c19% [month-on-month] m-o-m to $2.61 billion, yet it still remains below its level of $9.18 billion a year earlier, and net international reserves (NIR) inched up for the sixth consecutive month by 0.4% m-o-m to $34.3 billion in February, while dropping 16.2% [year-on-year] y-o-y.”

In its 2 February 2023 meeting, the MPC maintained the benchmark overnight deposit and lending rates unchanged at 16.25% and 17.25%, respectively, after it hiked policy rates by 800 bps in 2022 and by 500 bps in the fourth quarter (Q4) of 2022 alone.

On the global front, the US Federal Reserve increased interest rates last week by 25 bps, bringing its total rate hikes year-to-date to 50 bps, after it increased interest rates by 425 bps in 2022.

Earlier today, the central bank offered T-bills worth a total of EGP 34 billion through two auctions.

It is worth noting that the CBE launched a new website to endorse the user experience.