Looming Fed Taper Set to Keep Egypt Rates High
Egypt looks set to retain the world’s highest real-interest rate on Thursday, readying to cushion itself from the potential impact of the U.S. Federal Reserve’s tapering on emerging markets.
After cutting a combined 400 basis points last year, the central bank will be mindful of expected policy tightening in advanced economies, moves that could undercut the appeal of the North African country’s local-currency debt for foreign investors.
All 13 economists surveyed by Bloomberg predict the Monetary Policy Committee will hold the benchmark deposit rate at 8.25% and lending rate at 9.25% for a seventh consecutive meeting.
Read more: U.S. INSIGHT: Devil Is in the Fed Taper Signal, Not the Details
“Amid uncertainty on the global front and a largely stable domestic inflation environment, we expect policy rates to be kept on hold until June 2022,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes. While the latest U.S. job reports have cast doubt over when tapering will occur, “the central bank is likely to remain anxious about the Fed’s next move,” he said.
Egypt offers the highest real interest rate -- the differential between its key policy and inflation rates --- among more than 50 economies tracked by Bloomberg. That ranking has made its debt a favorite for overseas investors who hold around $33 billion in local bonds and bills, an important buffer for the Arab nation as tourism awaits a full recovery from the coronavirus pandemic.
“The Fed’s tapering would usher the beginning of the end of the low-interest rate environment that benefited emerging markets over the past decade,” Abu Basha said. A reversal would “pose some challenges to EM, especially those that relied heavily on capital inflows to fund their twin deficits.”
Local inflation has managed to ride out global price rises and is likely to remain within the central bank’s 5-9% target range this year. While that theoretically gives authorities scope to make their first cut of 2021, analysts see concern over the Fed taking precedence.
“The high yield continues to draw offshore portfolio flows, which will likely remain a crucial source of funding until current account pressures ease,” Simon Williams, HSBC Holdings Plc’s chief economist for Central & Eastern Europe, the Middle East and Africa, said in a note.
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