EgyptInsightsMacroeconomic updateMonetary Policy

7 August 2023

Egypt MPC Update: Inflation Fears Fuel Hawkishness

In brief

  • The Central Bank of Egypt hiked its overnight deposit rate by 100bps to 19.25% in its August 2023 MPC meeting. Amidst sustained inflation in the second quarter, the policymakers delivered the first hike decision in three MPC meetings.
  • Notwithstanding subdued external factors, broad-based pressures have given domestic inflation an upward lift. Inflation climbed to a record high of 35.7% y/y (2.1% m/m) in June 2023, driven by an uptick in core inflation to 41.0% y/y (1.7% m/m).
  • The surge in banking system’s net foreign liabilities to USD 27.1bn in June 2023 (Dec 2022: USD 20.1bn) cements further Egyptian Pound (EGP) wobbles in the near-term, exacerbated by the slow implementation of IMF reforms.
  • Foreign investors increased their holdings of T-Bills at the end of 1Q2023, resulting in reduced portfolio outflow in the quarter. Nevertheless, we flag some jittery amongst foreign investors looking into Egypt due to the uncertain FX policy and the potential outcome of Moody’s ‘review for negative downgrade’ which we expect will be completed this week.
  • Squaring the circle of the authorities meeting end-March quantitative performance criteria and indicative targets, the delay in implementing FX reforms raises the bar for the upcoming IMF review. Although Egypt’s Prime Minister announced signing contracts worth c. USD 1.9bn, effecting the sale of public assets mid last month, we assess a lack of urgency in executing these set of reforms
  • Thus, we foresee a higher likelihood of another devaluation event prior to the completion of IMF review, to make up for the lost momentum with the privatization plan. We suspect that the monetary authorities held monetary policy consultation with the IMF; with June inflation at 20.7pp above the upper outer band of 15.0%.

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