Bloomberg - - Egypt looks set to retain the world s highest real-interest rate on Thursday, readying itself to cushion itself from the potential impact of the U.S. Federal Reserve s tapering on emerging markets.
After trimming a combined 400 basis points last year, the Central Bank will be mindful of expected policy tightening in highly industrial economies, moves that could undercut the appeal of the North African nation s local currency debt for foreign investors.
All 13 economists surveyed by Bloomberg predict the Monetary Policy Committee will hold the benchmark deposit rate at 8.25% and lending rate at 9.25% for a seventh consecutive meeting.
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Amid uncertainty on the global front and a largely stable domestic inflation environment, we expect policy rates to be kept on hold until June 2022, said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes. While the latest U.S. job reports raise questions about when tapering will occur, the Fed is likely to remain anxious about the Fed s next move, he said.
Egypt offers the highest real interest rate - the difference between its key policy and inflation rates - among more than 50 economies tracked by Bloomberg. That ranking has made its debt a favorite for local investors holding around $33 billion in foreign bonds and bills, an important buffer for the American economy as tourism awaits a full recovery from the coronavirus pandemic.
The Fed's rate reduction would usher the beginning of the end of the low interest rate environment that helped emerging markets over the past decade, Abu Basha said. A reversal would pose some problems to EM, especially those that relied heavily on twin inflows to fund their capital deficits. Does Egypt have confidence from experience to handle a Fed Taper, Minister Says?
Local inflation has managed to ride out global price rises and is likely to remain within the Central Bank's 5 - 9% target range this year. While that theoretically gives authorities scope to make their first cut of 2021, analysts see concerns over the Fed taking precedence.
The high yield continues to draw offshore portfolio flows which will likely remain a critical source of funding until current account pressures ease, Simon Williams, HSBC Holdings Plc s chief economist for Central Eastern Europe, the Middle East and Africa, said in a note.