HC expects the CBE to cut interest rates by 200 bps at its upcoming

In light of Egypt’s macro economy developments and the geopolitical conditions, HC Securities & Investment expects the CBE to cut interest rates by 200 bps at its upcoming May 22, 2025 meeting.

External Position Stabilization Indicators

Financials analyst and economist at HC, Heba Monir commented: “We see Egypt’s external position stabilizing as per the following indicators:
(1) the 2Q24/25 BoP recorded a surplus of USD489m, reversing a deficit of USD638m in 2Q23/24 and USD991m in 1Q24/25, due to mainly reporting positive net errors and omissions of USD1.52bn, although we don’t have clarity on the nature of these net errors and omissions,
(2) the banking sector’s net foreign asset (NFA) position widening significantly by USD4.86bn m-o-m to USD15.0bn in March from USD10.2bn in February, reversing a net foreign liability (NFL) position of USD4.19bn a year earlier, which we attribute to Egypt attracting USD2.70bn in foreign direct investments (FDIs) in 1Q25 (a c15% y-o-y increase), receiving from the International Monetary Fund (IMF) the USD1.2bn tranche of the USD8.0bn Extended Fund Facility (EFF), and improved FX liquidity at banks,
(3) net international reserves (NIR) increasing by USD387m m-o-m in April to USD48.144bn from USD47.757bn in March, mainly due to a c8% m-o-m increase in gold, and a c12% m-o-m increase in Special Drawing Rights (SDRs), after receiving the IMF’s USD1.2bn tranche of the USD8.0bn EFF and deposits not included in official reserves also increasing by USD554m m-o-m to USD11.619bn in April,
(4) Egypt 1-year CDS stabilizing at 354 bps since its record of 379 at the beginning of the year.

Economic Activity and Inflation Trends

However, the PMI index dropped further below the 50.0 neutral threshold to 48.5 in April from 49.2 in March on lower consumer spending. With regards to inflation, April’s inflation came close to our estimate of 13.8% y-o-y and 1.5% m-o-m, and also in line with the Reuters poll median estimate of 13.9%, mainly due to the hike in gasoline and diesel prices on 11 April by c12–15%.

T-Bills Auction and Yield Dynamics

As for the T-bills auctions, yields are fluctuating, with the latest 12M T-bills auction of 24.833% reflecting a positive yield of 9.32% on the 12M inflation estimate of 11.8% (after deducting a 15% tax rate for European and US investors), while the estimated average required rate of return by foreign investors on the 12M T-bills declined to 26.3% from 28.0% in the previous month, based on our calculations, considering a lower inflation differential between Egypt and its trading partners.

Carry Trade and Currency Appreciation

We believe that the attractiveness of the yields on Egyptian treasuries has led to more Carry Trade inflows, which justify the recent 3% EGP appreciation against the USD since Trump and China reached an agreement on a 90-day pause and substantially moved down the tariff levels.

Conclusion: Expected Rate Cut to Stimulate Growth

From the above, we conclude that the Egyptian economy was able to contain the inflationary pressures (albeit still above the CBE’s targets; however, on a downward trend mainly due to base effect), our carry trade is still attractive, and there is a noticeable improvement in the NFA position of the banking sector, facilitating the FX liquidity and availability. Therefore, we expect the MPC to cut interest rates by 200 bps at its upcoming 22 May meeting, mainly to stimulate economic growth, given a relative stability in the domestic and international economic conditions compared to the previous month.”

Review of Recent Monetary Policy Decisions

It is worth mentioning that, in its 17 April meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) cut the benchmark overnight deposit and lending rates by 225 bps to 25.0% and 26.0%, respectively, for the first time, after it hiked them by 1,900 bps since it started its tightening policy in 2022.

Inflation Data and Global Monetary Policy Overview

Egypt’s annual headline inflation accelerated to 13.9% in April from 13.6% y-o-y in March, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices increased 1.3% m-o-m compared to a 1.6% m-o-m increase in March.
On the global front, on 7 May, the U.S. Federal Reserve maintained the target range for the federal funds rate at 4.25-4.50%, leaving the total cuts at 100 bps after it hiked rates by 525 bps since it started tightening policy in 2022, while the European Central Bank (ECB) lowered the key ECB interest rates for the deposit facility, the main refinancing operations and the marginal lending facility by 25 bps on 17 April to 2.25%, 2.40% and 2.65%, respectively, bringing total cuts to 175 bps, since it started cutting rates in June 2024 after it hiked rates by 450 bps since it started its tightening policy in 2022.

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