GhanaInsightsMacroeconomic updateMonetary Policy

9 February 2023

Egypt : FX Adds Upside Tilt to Policy Outlook

In brief

  • The Central Bank of Egypt (CBE) unexpectedly left the benchmark deposit rate unchanged at 16.25% during its Monetary Policy Committee (MPC) meeting held last Thursday.

 

  • Base effects should see the inflation rate (Dec 2022: 21.3%) trend lower from 2Q2023, but a linear path for inflation normalization may not be clear-cut with FX pass-through yet to fully filter through

 

  • With an explicit inflation target of 7.0% (±2.0%) on average by 4Q2024, the CBE telegraphed policy pause for longer as the frontloaded rate hikes transmit through the market.

 

  • Nevertheless, there are two issues driving FX expectations. The first one is ‘If” the CBE will stick to its course this time round.

 

  • Secondly, the idea of a flexible exchange rate is not necessarily two-directional but asymmetric, with some downside bias for the Egyptian pound.

 

  • Thus, with FX pass-through still filtering through, we see scope for rate tightening (cumulative +200bps) in upcoming MPC meetings in 2023.

 

  • With real rates expected to remain in the negative territory, we remain less constructive on the local rates (364-day T-Bills)