Egypt Sticks With World’s Highest Real Interest Rate

(Bloomberg) -- Egypt kept monetary easing on pause for a third meeting on Thursday, counting on the world’s highest real interest rate to maintain foreign interest in its debt as investors exit other emerging markets.

The Monetary Policy Committee said it held the deposit rate at 8.25% and the lending rate at 9.25%. The decision was predicted by all 12 economists surveyed by Bloomberg. Authorities slashed rates a combined 850 basis points through 2019-20.

Most of the Egyptian economy’s “leading indicators are gradually recovering to their pre-pandemic levels,” the MPC said in its statement explaining the decision. “Global economic and financial conditions are expected to remain accommodative and supportive of economic activity over the medium term.”

Attractive yields and a stable currency have made the North African nation a top pick for foreign investors targeting emerging markets. Foreign holdings in its local debt hit their highest-ever level of $28.5 billion in February, reversing outflows in 2020 spurred by the coronavirus pandemic. Egypt’s real rate -- the difference between its inflation and policy rates -- is the highest of more than 50 economies tracked by Bloomberg.

Emerging-market bond funds saw the biggest outflow in almost a year in the week through March 10 as rising U.S. Treasury yields dented demand for riskier assets. Developing-nation currencies have weakened about 1% from a record high reached in mid-February.

“While portfolio flows and the pound have remained broadly stable in recent weeks, we believe Egypt is not immune to these developments,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. before the decision.

Egypt is also treading carefully after the recent spike in global commodity prices, including key staples.

“Global food prices will eventually filter into domestic food prices as companies start restocking at the new prices” said Mohamed Abu Basha, head of macroeconomic research at EFG Hermes.

Inflation accelerated to 4.5% in February, lower than expected and well below authorities’ target of 7%, plus or minus 2 percentage points.

While Abu Basha doesn’t expect a rate cut before “more clarity on future of global rates,” Soussa predicts a 50 basis points cut in the second quarter and another 50 bps in the third quarter “on the assumption that global uncertainties subside.”

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