World’s Top Real Rate Is Just Right for Egypt: Decision Guide

Spiking U.S. Treasury yields and a rise in global commodity prices mean Egypt is likely to leave the world’s highest real interest rate unchanged on Thursday.

With investors fleeing riskier assets, Egypt’s focus will likely be on retaining the competitive edge that’s driven foreign investment in its debt to a record high. All 12 economists surveyed by Bloomberg predict the central bank’s Monetary Policy Committee will hold its benchmark deposit rate at 8.25% for a third consecutive meeting.

Foreign holdings in local Egyptian debt hit its highest-ever level of $28.5 billion in February, reversing outflows in 2020 spurred by the coronavirus pandemic. It’s important funding for the Middle East’s most populous nation as earnings from key sectors such as tourism await a revival.

“Real rates are still high and inflation is below target,” said Simon Williams, chief economist for Central & Eastern Europe, the Middle East and Africa at HSBC Holdings Plc. “But with the global backdrop currently so volatile, I’d be surprised to see Egypt restart its easing cycle now.” The central bank cut a combined 850 basis points in 2019-20.

World’s Top Real Rate Is Just Right for Egypt: Decision Guide

Egypt’s real rate -- the difference between its inflation and policy rates -- is the highest of more than 50 economies tracked by Bloomberg. Local currency bonds have returned 1.6% since the end of 2020, in contrast to an average decline of 2.7% across emerging markets this year to date, according to Bloomberg Barclays indexes.

Emerging-market bond funds saw their biggest outflow in almost a year in the week through March 10. Meanwhile, developing-nation currencies have weakened about 1% from a record-high reached in mid-February.

Although the pound and inflows have been broadly stable in recent weeks, “we believe Egypt is not immune to these developments,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. “This is likely to put the central bank in wait-and-see mode.”

World’s Top Real Rate Is Just Right for Egypt: Decision Guide

Authorities will also be weighing a climb in global commodity prices. Egyptian inflation accelerated to 4.5% in February, and while that was lower than expected, higher costs for oil and food “will eventually filter into domestic prices as companies start restocking,” said Mohamed Abu Basha, head of macroeconomic research at EFG Hermes.

World’s Top Real Rate Is Just Right for Egypt: Decision Guide

Any acceleration, though, will likely see the rate remain within the central bank’s target range of 5%-9%, according to the Cairo-based investment bank. An extensive system of food subsidies and a price indexation mechanism for petroleum products are likely to limit the risk, Soussa said.

©2021 Bloomberg L.P.

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