Egypt central bank may hike rates on Thursday

Reuters

Egypt’s central bank is expected to raise interest rates on Thursday, a Reuters poll showed, in an attempt to fight inflation and attract foreign investment as the country pushes through with economic reforms.
Egypt has been struggling with a shortage of foreign currency since the 2011 uprising drove away tourists and foreign investors — two major sources of hard currency. Reserves have more than halved since then to around $16.5 billion in August.
The government has been pushing through with economic reforms that are expected to raise inflation, including energy subsidy cuts and a value-added tax that was implemented this month. All 12 contributors to the Reuters poll said they expect the monetary policy committee (MPC) to raise rates on Sept. 22, with forecasts ranging from a 50 basis point hike to a hike of 200 basis points.
Two economists expect a 200 basis point hike, seven expect a 100 bps hike, while two others expect a 50 bps hike and one expects a 75 bps hike. “We believe the hike will come within the CBE’s inflation targeting regime and to
attract investment in the Egyptian pound for the household sector and foreign investors,” said economist Reham Eldosoki at Arqaam Capital. She expects a 100 basis point hike.
“A more aggressive hike would reflect a higher inclination to attract portfolio investors with expectations of an imminent devaluation,” she said. Headline inflation jumped to 15.5 percent in August, its highest level in nearly eight years. President Abdel Fattah al-Sisi is under growing pressure to revive the economy and curb inflation to avoid a public backlash.
The International Monetary Fund agreed in principle last month to grant Egypt a $12 billion three-year loan facility to support the government’s economic reform programme. The IMF deal has added to market expectations that the central bank will make another steep devaluation this year.
Egypt devalued the pound by almost 14 percent in March to about 8.78 to the dollar in a bid to crush a black market that has burgeoned amid an acute shortage of
foreign currency. But the black market rate has since depreciated, and pressure is back on the central bank to devalue the pound which is currently trading on the black market 40 percent weaker than the official rate.
Some economists believe the central bank could soon also introduce a managed float of the pound that could see it weaken further against the dollar.
“We are expecting a super rate hike (200 bps) primarily to set the stage for an imminent flotation of the pound versus the US dollar, which we expect to take place by maximum 6 October 2016,” said Hany Genena, head of research at Beltone Financial.