CAIRO: Rising yields on Egyptian treasuries signal the market is expecting the central bank to raise interest rates this month to dampen inflation and ease mounting pressure on the currency, bankers and economists said.
Egypt cancelled a treasury bond sale on Monday as yields soared, with banks apparently unwilling to fund increasingly expensive and risky borrowing.
The central bank raised interest rates by 50 basis points in December but that move did not immediately feed into treasury yields as state-owned banks bid down rates at regular auctions to minimise the cost of government borrowing, bankers said.
But treasury yields have risen in recent weeks, with the 10-year bond jumping from 15.788 percent to 15.999 on Monday.
The Monetary Policy Committee (MPC) kept rates on hold last month, balancing its need to dampen inflation with efforts to stimulate growth. But economists now bet on a hike at the next meeting on March 17.
“The yields on treasuries… are signalling that the market is expecting a hike in interest rates in the upcoming MPC meeting, which in our view is definitely the expected direction in 2016,” said Hany Farahat, senior economist at CI Capital.
“The timing and magnitude depend on several factors. The sooner the Central Bank of Egypt devalues the pound the less they would need to increase policy rates going forward.”
Import-dependent Egypt’s currency has faced downward pressure since the 2011 uprising drove away tourists and foreign investors. Forex reserves have more than halved since the revolt to some $16 billion.
To preserve dollars for essential imports like food and fuel, the central bank has rationed forex supplies, hampering trade. The crisis has worsened since the bombing of a Russian passenger plane in October further hit tourism.
Businesses and economists say devaluation is necessary, but the central bank has resisted to avoid stoking inflation, already in double digits, and prompting a new cycle of downward pressure that it lacks the firepower to stave off.
That leaves it with little option, economists say, than to raise rates to make Egyptian pound investments more attractive.
Egypt’s lending and deposit rates are already high at 10.25 and 9.25 percent respectively, however, and economists say higher rates could undermine growth.
It could also prove expensive for the government, whose debt servicing accounts for about a quarter of spending.
Angus Blair, chief operating officer of Pharos Holding, forecast a 50-basis-point increase as the government seeks to raise paper to cover its budget.
“You are getting to a level that is uncomfortable for Egypt but… private sector and household debt are very low which… helps counterbalance (the impact) on the overall economy,” he said.