Change rate call to 50bps hike on VAT implementation…

We change our call for Thursday’s Monetary Policy Committee (MPC) meeting to a 50bps hike (bringing the mid-corridor rate to 12.75%), from our previous expectation that it would be kept on hold, in light of the recent decision by the Ministry of Finance (MoF) to implement the VAT immediately. The MoF had originally said implementation would only take place a month after the law’s ratification in order to prepare the executive regulations, but the MoF has implemented the tax after the recent presidential ratification and publication of the law in the official gazette. Anecdotal evidence suggests businesses have in many cases implemented the tax already. Fast-track implementation comes after tobacco prices rose by an average of 20% a few days ago and electricity prices rose by 50% on average in late August therefore warranting a policy rate hike, in our view. We reiterate our forecasts that the VAT will add c2pp to headline inflation. We maintain our average inflation forecast of 14.3% Y-o-Y in FY2016/17, up from 10.2% the previous year.

…and closing of USD5-6bn funding gap

An additional, though less material, factor behind our changed rate call is news that the government is close to raising the additional funding required by the IMF to ratify the Staff Level Agreement signed on 11 August. As a result, Finance Minister Amr El Garhy has said that ratification of the agreement could take place between end-September and mid-October. In that sense, authorities may use this week’s meeting to start tightening monetary policy ahead of an expected EGP adjustment.

We see a further 100-150bps hikes in 2016 after Thursday’s move

We also update our forecasts for further monetary tightening in 2016, expecting another 100-150bps in hikes, over and above the 50bps we expect Thursday. We previously expected a 100bps hike in total for the rest of the year. The CBE can hold MPC meetings at dates outside of the regular planned schedule, and it is possible that the CBE could raises rates between Thursday’s meeting and the following MPC on 17 November. The CBE has already increased rates by 250bps in 2016 YTD.

Edging closer to EGP adjustment as liquidity builds up

Ratification of the IMF agreement will give the CBE a liquidity buffer of anywhere between USD7-13bn (see Fig. 1) in the coming few weeks - the variance depends on the terms of USD6bn in additional funding for which no details have been released. This liquidity clearly provides authorities with the means to press ahead with the much-awaited EGP adjustment, which we now see taking place in Oct/Nov.