Egypt’s policy rates seen in negative double-digit for most of 2023

“We factor in a 200 [basis points] bps hike in the policy rate for the March meeting but we do not rule out a larger 300 bps hike,” the research firm unveiled. This follows the unexpected jump in annual headline and core inflation in February to 32% and 40%, respectively, as well as more pressure on FX indicated by non-deliverable forward (NDF) pricing.

Morgan Stanley added: “We expect 400 bps of additional tightening in the policy rate to 20.25% by July, with the bulk of it likely to be delivered at the end of this month.”

Meanwhile, significant tightening of the policy rate can help to contain forecasts on the foreign exchange market (FX) in addition to inflation, according to the recent Morgan Stanley report.

It further factored in a moderate adjustment in EGP/USD with expectations to witness progress in the planned sales of state-owned enterprises (SOEs) until June accompanied by more FX flexibility after the CBE holds its 30 March meeting and the International Monetary Fund’s (IMF) first review, which is scheduled around the same date.

“Inflation should continue to rise amid FX passthrough effects and the recent fuel price hikes, peaking at around 38% [on an annual basis] in August/September 2023 in the baseline,” according to the report.

Egypt’s annual headline inflation is projected to hit 13.6% at the end of 2024, above the CBE's upper limit of the inflation target which hits 9% on an annual basis. Morgan Stanley expects the Arab republic’s annual real gross domestic product (GDP) growth to slow to 4.3% in fiscal year (FY) 2023 as a result of domestic demand while it would recover to 5% in FY24.

“Despite real interest rates remaining below the growth rate, debt/GDP will likely go up in FY23 and remain elevated due to adverse valuation effects on the FX-denominated part of debt and increased interest payments,” the financial services company said, adding: “We see debt/GDP rising from 92% in FY22 to 96% in FY23, declining back to 92% in FY24.”

Earlier this week, HC Securities & Investment expected that the Monetary Policy Committee (MPC) of the CBE would continue to tighten policy rates by nearly 200 bps in the 30 March meeting, in a bid to tame higher inflation rates.