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World’s Second-Highest Real Rate Could Be Here to Stay for Egypt

Mirette Magdy
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World’s Second-Highest Real Rate Could Be Here to Stay for Egypt

(Bloomberg) -- Egypt’s central bank will probably preserve one of the world’s highest inflation-adjusted interest rates when it meets on Thursday, which has drawn investors back to the nation’s assets.

For the first time since the end of February, Egypt this month saw net capital inflows, according to EFG Hermes, as sentiment turns in the country’s favor after assistance from the International Monetary Fund. Adjusted for prices, Egypt’s rates are second-highest only to Malaysia among more than 50 major economies tracked by Bloomberg.

All but one of the 11 economists surveyed by Bloomberg predict the Monetary Policy Committee will maintain its key deposit rate at 9.25%. It trimmed rates a combined 450 basis points last year and another 300 basis points at a March 16 emergency meeting.

“While clearly there is room for a rate cut given the high margin of real yields and the global direction toward easing monetary policy amid Covid-19, we think the central bank will prefer to hold rates for now,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes who estimates net inflows at up to $400 million this month.

A pause would “support the renewed capital inflows into the local debt market,” he said. “Egypt has regained investors’ interest as it has nearly covered its funding gap and the pound recently showed more flexibility.”

The return of foreign capital will help undo some of the damage wrought by the crisis after Egypt’s largest-ever outflows of about $17 billion in March and April. The country’s main sources of hard currency -- tourism, remittances and Suez Canal receipts -- are all facing disruptions caused by the virus.

Egypt’s currency is down about 2.7% since the end of March, a reversal from the first three months of the year when it strengthened more than 2% for its fifth quarterly advance in one of the best performances globally.

Annual inflation has meanwhile decelerated to 4.7% in May, its lowest level since November and well below the central bank’s target of 9%, plus or minus 3 percentage points, by the end of the fourth quarter.

“We expect rates to be on hold, driven by continued uncertainty in the global environment -- trade and portfolio flows -- that have put downward pressure on the pound recently,” said Farouk Soussa, an economist in London at Goldman Sachs.

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