The MPC will hold a policy rate meeting on December 22 and the MPC may be forced to raise interest rate by another 100bps despite the signals for weakening demand and consumption. Urban CPI inflation accelerated to five-year high of 18.8% y/y in November following 16.2% y/y in October, driven by the weakening pound and second-round effects from higher petrol and diesel prices. We remind the MPC held an emergency meeting in late October when the interest rates were hiked by 200bps, the pound was devalued by 15% and it was announced Egypt would switch to a durable flexible FX rate as opposed to the facto tightly managed float. Consequently, the pound started to depreciate against the USD and other currencies, which is likely to offset the positive effect from falling global food and energy prices going forward. Consumer inflation thus is set to remain elevated due to FX weakness, strong expansion in money supply, sustained public expenditure amidst supply-side bottlenecks.
The IMF Board will discuss Egypt's USD 3bn Extended Fund Facility on December 16 and the weakness of the pound is expected to be a hot topic. Some analysts say the pound should have weakened by more since the MPC committed to a durably flexible FX rate in late October. Some analysts even say the MPC may hold an emergency meeting right before the IMF Board meeting (that would be Wednesday night or Thursday) when it would hike interest rates and devalue the pound again. We believe the chance for another emergency meeting is rather slim as it could undermine the credibility of the central bank. Rather, we believe the MPC will watch for signals from the IMF on Friday and then decide on how to continue with monetary policy, where we see increasing chances for further tightening on Dec 22.
Overall, Egypt's inflation outlook has deteriorated sharply since Russia's invasion of Ukraine, and given the sharp tightening in advanced economies and the weakening pound, we expect the MPC to hike the interest rates at least one more time by the end of Q1 2023. Cumulatively, interest rates have been raised by 500bps since Russia invaded Ukraine, which triggered a global sell-off, sent energy and food prices to record highs, and clouded the global economic outlook.