• CBE hikes 150 basis points; 50 bps higher than we expected The Central Bank of Egypt raised policy rates aggressively, just a few days after devaluing the EGP. Policy rates were hiked 150 basis points with the rate now standing at: 10.75% for the overnight deposit rate, 11.75% for the overnight lending rate and 11.25% for the discount rate. The decision was above our expectation of a 100 bps hike as we believe the CBE is looking to control inflation expectations and attract foreigners into the domestic debt market. Indeed, the CBE said in its statement that the higher premium of the EGP in the parallel market “already had a pass-through effect on domestic prices.”
• Rising inflation expectations warranted a rate hike … Various import rationalisation measures and weaker USD-EGP in the parallel market have already been pushing inflation expectations higher in the economy, even ahead of the EGP devaluation earlier this week. The latter is obviously going to bring headline consumer price inflation back to double-digit levels from 9.1% Y-o-Y in February. Higher rates are also complementary to the devaluation in order to tighten levels of domestic liquidity thereby discouraging speculative activity.
• …and should help attract foreign investors into local debt market Higher rates are also critical, in our view, to attract foreign investors into the domestic debt market. Such flows are likely to constitute a key pillar for the CBE to reach its year-end foreign reserve target of USD25 billion (from its current USD16.5 billion). To that end, and adjusting for the cost of the offered call option to protect investors against FX risk (see inside for more details), yields needed to go higher to attract foreign investors. We believe there is still more room for yields to go higher as the current ones still might not be that attractive for foreign investors.

Mohamed Abu Basha