Investor Darling Egypt Holds Rates Amid Inflation Worries

(Bloomberg) -- Egypt’s central bank held the benchmark deposit rate unchanged on Thursday, defying expectations of a cut as it sought to keep inflation on target.

The bank’s Monetary Policy Committee kept the overnight deposit rate at 15.75% and the lending rate at 16.75%.

Most economists surveyed by Bloomberg had predicted a cut of as much as 100 basis points, arguing that while inflation had accelerated for two consecutive months through February, the central bank could decide that a stronger pound and robust foreign inflows were enough to allow further easing -- despite looming prices pressures.

The Muslim fasting month of Ramadan, which begins in May, and an ensuing holiday tend to cause a spike in food costs and the government is also expected to adjust fuel prices by the end of June.

“I’m astonished they left it as is,’’ said Dina Rofael, senior economist at Sigma Capital in Cairo. She said the recent upgrade in the country’s credit rating and the Federal Reserve forecast for no rate increases in 2019 should have given the central bank room to continue.

“When a central bank takes a decision to cut, it should be a cycle,” said Rofael. “To have an impact on the economy, there should be more than one cut taking place, one after the other.’’

Monetary stimulus is needed to revive growth and attract foreign direct investment. Business activity in Egypt’s non-oil private sector slipped in February to its lowest level since September 2017. The central bank is still a long way from unwinding rate increases deployed to steady inflation after floating the currency in November 2016.

While price growth has since stabilized, however, it accelerated for a second month to an annual 14.4 percent in February on the back of rising food costs.

In its statement, the MPC said the latest spike in inflation was linked to food and it was holding rates to steady prices. “The MPC decided that keeping key policy rates unchanged is consistent with achieving the inflation target of 9 percent (+/- 3 percentage points) in 4Q 2020 and price stability over the medium term, it said.

“We expect the CBE to keep rates unchanged until the second half of the year, when it will resume its easing cycle,” said Ziad Daoud, Chief Middle East Economist for Bloomberg Economics in Dubai. 

EGYPT REACT: CBE Holds Rates, Should Resume Easing Cycle in 2H

Another factor weighing on policymakers may have been concern that further cuts would rattle investors who have shown renewed interest in the country’s local debt and the tempting yields on offer. Turkey’s lira has suffered another bout of volatility in recent weeks, possibly raising worries of contagion.

EFG-Hermes economist Mohamed Abu Basha, who had predicted a hold, said “recent emerging market volatility considering the Turkey events have also played a role in the decision, as it stopped the continuous” appreciation in the Egyptian pound since late January.

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