Will EGP strengthen further despite unchanged interest rates and higher inflation?

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has left interest rates on EGP unchanged in its first meeting in 2017. This comes on the back of a stronger EGP vis-à-vis the USD and despite higher inflation rates. What does this mean for EGP?
By Markets Chimp

2/16/17 10:14 PM

How high will the Egyptian pound (EGP) go is the question on the minds of Egyptians in general and foreign investors in particular. It has strengthened so far in 2017 by 12.7% vis-à-vis the US dollar, trading last at EGP16.04/USD. Word on the street is that inflows of some USD635 million by foreign investors buying into Treasuries have helped nudge the local currency higher versus the greenback. Meanwhile, Egypt’s headline urban inflation was reported at 28.1% in January 2017 (vs. 23.3% in December 2016), with core inflation recording a multi-year high of 30.9% (vs. 25.9% in December 2016).

Despite higher inflation, the MPC has opted to leave interest rates unchanged at 14.75% for overnight deposits and 15.75% for overnight lending while keeping the CBE’s main operation and discount rates at 15.25% each. The MPC has attributed the month-over-month accelerated inflation (4.1% in January vs. 3.1% in December) to the introduction of custom tariffs by end of 2016, underlining that inflation is driven mostly by cost-push factors as opposed to demand-pull. In fact, the MPC expects inflation “to drop after transitory cost-push effects subside and monthly inflation rates decline”, but it failed to time that drop although it referred to the base effect, which suggests November 2017.

Will the EGP continue to strengthen in the coming weeks depends on what has been really driving the recent recovery. We think it has mostly been driven by a drop in demand for US dollar in view of lower imports needs, which should reduce trade deficit further. On the other hand, this has not been driven by excess supply of US dollars in the market. For me, the market price would only be fair if anyone can buy US dollars from the banks at any time.


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