HC Research MPC meeting expectations

November 15th, 2016 – The Central bank of Egypt’s (CBE) Monetary Policy Committee (MPC) exceptionally hiked its rates by 300bps with the exchange rate liberalization decision on 3 November 2016. Along with the hike, several monetary tightening tools have been introduced, including some banks offering 18 months certificates of deposits with up to 20% interest and the CBE offering longer bank deposit maturities. The monetary tightening policy is twofold; it aims to preserve the value of the EGP by absorbing excess liquidity to avoid the overshooting of the exchange rate and contain inflationary pressure with the floatation.

Over the last week the volatility in the exchange rate was high, during the first few days the EGP was depreciating against the USD to reach a low of cEGP18/USD on Tuesday at which banks’ resources increased from retail and private remittances selling. Banks with sizable resource stream offered competitive prices to corporate clients forcing the overall rates to cross EGP17/USD downwards. The calmed rate was accompanied by positive news from CBE securing USD2bn in a financing deal followed by the IMF board approval of the 3-year USD12bn program, which improved the sentiment over the EGP.

With only 6 working days into the floatation, the volatility of the exchange rate is still high and the sentiment is not yet assured as the currency movement is affected by several forces including retail profit taking (not a sustainable resource), remittances sales directed to banks (a sustainable resource), and corporates not over buying foreign currency until the resource stream and policy actions stabilize. Likewise, foreign investors have been affected by the flow of news but still awaiting confirmation over the sentiment. According to a market sense that HC has conducted, the fixed income market was tapped by foreign investors over the past week but with no sizable volumes.

Given the volatility in the FX market, HC believes that the 300bps hike effect has not been fully utilized in absorbing EGP liquidity to contain inflation and defend further EGP deprecation. Investors, retail clients and corporates are still overwhelmed with the exchange rate movement despite the interest rates offered. Accordingly, HC believes that any further hike will be a lost tool to defend against future inflation and EGP devaluation. Moreover a further hike will also be a challenge to growth given the increased cost of borrowing and risk free rate. While HC views any rate cut on the back of the recently improved EGP exchange rate as a premature action, since the trend is not yet confirmed. Hence, HC expects the CBE to keep its policy rate on hold in the upcoming MPC meeting on 17 November as any policy rate action at the current stage will be unexploited