Aurelia Butler

The bank hiked the lending rate to 22.25% and the deposit rate to 21.25%, its Monetary Policy Committee said in a statement. Most analysts did not expect a hike. The median forecast in a Reuters poll of 16 analysts was for the central bank to hold rates steady. Six analysts expected a hike of between 100 and 300 basis points.”The hike is likely coming ahead of a EGP devaluation and the announcement of an expanded IMF deal,” said Monica Malek of Abu Dhabi Commercial Bank.Egypt has been in talks for the last two weeks with the International Monetary Fund to revive and expand a $3 billion loan agreement signed in December 2022. IMF disbursements on the loan were put on hold last year after Egypt did not follow through on a pledge to let the Egyptian pound (EGP) respond to market forces and instead fixed it against the dollar in March. Farouk Soussa of Goldman Sachs disagreed a devaluation was imminent. The rate hike “is the start of a process of policy tightening,” he said. But that “will take some time and must be supported by enhanced FX liquidity.”The Egyptian pound, fixed at 30.85 to the dollar since March, has been trading on the black market as low as 71 pounds. Egypt’s already weak economy was hit by the Gaza crisis, which dampened tourism and decreased shipping through the Suez Canal, a major source of foreign currency. The MPC said growth fell to 2.7% in the third quarter of 2023 from 2.9% in the second and was expected to continue softening through June. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The IMF managing director said the lender was “very close” to concluding a loan deal with Egypt widely seen as crucial for easing a foreign currency crisis that has been suffocating the economy of the heavily indebted Arab country.“We may need a little bit more time,” Kristalina Georgieva said at a press briefing at the fund’s headquarters in Washington. “But we are in this very last stretch where we are working on the details of implementation and both sides, Egyptians and us, want to get that right.”Georgieva made clear that the war in Gaza was the main reason why the IMF was pushing ahead with an expanded loan deal despite having stopped disbursements on an earlier $3bn loan. It halted payments last year because Cairo did not meet conditions to move to a flexible exchange rate and reduce the footprint of the state and the military in the economy.She said “we worry a lot” about countries that “border the epicentre” of the war in Gaza, naming Egypt and Lebanon and to a lesser extent Jordan. The drop in shipping revenues as a result of attacks by Houthis rebels in Yemen on Red Sea shipping “added anxiety” for Cairo. “We recognise that the financial gap for Egypt has increased . . . they are losing revenues from the Suez Canal,” said Georgieva. Analysts say the Egypt-IMF discussions have focused on a package of at least $10bn, some of which would come from the lender and the rest from other donors likely to include the World Bank. “Markets are looking at $10bn, even if it is not all from the IMF,” said Farouk Soussa, Middle East and North Africa economist at Goldman Sachs.Egypt has been enduring its worst economic crisis in decades, with soaring inflation — which topped 34 per cent in November — and a severe foreign currency shortage that has resulted in a widening chasm between the official and black market exchange rates. The country is the second-largest debtor to the IMF, with four loan agreements since 2016.The Egyptian pound was trading at 67 to the dollar on the parallel market on Thursday. The official rate has been fixed at 30.9 since March 2023.Speculation has been rife that the central bank would devalue the currency or allow it to float as part of reforms needed to unlock the IMF package.Suez Canal revenue has fallen by 44 per cent since the start of the year compared with the same period in 2023, Osama Rabie, head of the waterway, said in a January 25 interview with Al Sharq TV. Analysts say the war on Egypt’s border had given new momentum in western capitals to back an IMF deal to salvage the country’s foundering economy.“The Gaza war has impacted the way the US looks at Egypt’s current situation and this has produced new flexibility,” said Michael Wahid Hanna, US programme director at the International Crisis Group. The Rafah crossing on Egypt’s border with Gaza was the main entry point for humanitarian supplies to the territory, he noted, and Cairo was “one of few regional players with real and active links to Hamas”, so able to play a role in mediation.The Egyptian government on Wednesday announced measures intended to narrow the deficit and level the playing field for the private sector. It has also halted any external financing for new national projects until June.Under Abdel Fattah al-Sisi, president since 2014, Egypt has embarked on a massive debt-fuelled infrastructure programme led by the military. Critics say that while some of the projects are addressing real needs, others such as a new administrative capital could have been deferred.James Swanston, economist at Capital Economics in London, said Egypt needed reforms and a credible exchange rate if investors were to return, and warned that “the consequences of no IMF deal would be pretty bad because the financial needs for debt repayment are pretty stark”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Milton Friedman believed the “long and variable lags” of active monetary policy made its goal of hitting an inflation target essentially unachievable. Central bankers invoked these flaws earlier in this cycle to allay fears of runaway inflation, by claiming that their rate rises would eventually come to tame it. Now that price growth has fallen rapidly, they could end up contradicting themselves by being too slow to cut rates.The US Federal Reserve and the Bank of England this week followed the European Central Bank’s recent decision to hold rates. With annual price growth now between 2.8 per cent and 4 per cent in the US, the eurozone and the UK, it is clear that the general direction for bank rates will be downwards this year. But central bankers remain in no rush to say when they will start to cut nominal rates. ECB president Christine Lagarde said summer was most likely, Fed chair Jay Powell pushed back on a March cut, and the BoE governor Andrew Bailey wants to wait for more evidence.Caution is understandable. Central bankers fear that inflation could bounce back. Wage growth is still high by historic standards. In America, economic growth has surprised to the upside. Instability in the Middle East is creating new supply chain disruptions, and the threat of higher oil and gas prices remains.Central bankers are also trying to manage market expectations. In the US, financial market conditions are only as tight as they were in the summer. As investors started to believe that the rate cycle had peaked, they priced in future cuts. Any suggestion that a cut is imminent could loosen conditions further than central banks want. Markets may have got ahead of themselves. In the US, they have priced in six cuts this year, compared to the three indicated by the Fed’s “dot-plot” of rate projections. Nonetheless, there is a risk that central bankers are being overly cautious.First, the predominant drivers of inflation in this cycle — supply chain snags, a natural gas price shock and soaring food costs — appear to have washed out. Weaker demand will also blunt the impact of any further supply chain snarl-ups. Goldman Sachs estimates that, as things stand, disruption to shipping in the Red Sea will only raise global core inflation by 0.1 percentage points this year.Second, although jobs markets remain strong, the evidence of cooling has mounted. Vacancies in Britain are at their lowest since the second quarter of 2021. Wage growth and job openings in the US have also slowed. Three-month annualised core inflation, which focuses on recent trends in underlying inflation, is near 2 per cent across the UK, the eurozone and the US. This means the need to maintain highly restrictive rates has fallen.Friedman’s lags are also still in play. More fixed-rate lending, particularly in the US and the UK, has slowed the transmission of higher rates to the economy. The full effect of peak rates is yet to be felt. Many households and businesses are yet to refinance; when they do, demand will weaken further. Cutting rates from their current restrictive levels would, then, hardly amount to a significant loosening, particularly as real rates are rising.The case for faster action is perhaps stronger in the particularly weak eurozone economy, compared to the US. But there are several moving parts, and geopolitical instability makes the task ever more complex. The ghost of Arthur Burns, the Fed chair who cut rates in the 1970s only to reverse course and raise them again when inflation jumped back, is clearly haunting central bankers. Avoiding embarrassment, however, is not a policy objective. If they claim to be “data dependent”, central banks may find themselves needing to cut rates sooner rather than later. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.EU leaders vowed to ease the burden of environmental rules in an attempt to quell protests by farmers, who demolished statues and started fires in Brussels during a summit on Thursday.European Commission president Ursula von der Leyen said after the leaders’ meeting that more changes would be put forward this month to cut red tape for farmers and rethink a recent wave of climate-related legislation.“I think it is fair to say that our farmers have shown remarkable resilience . . . but many challenges remain,” said von der Leyen. “The farmers can count on European support.”Tractors rolled into Brussels and blocked major arteries and squares less than 1km from where leaders were gathered, with riot police setting up rings of barricades to prevent farmers reaching the summit building.The demonstration in the EU capital follows weeks of farmers’ protests in Germany, France, Belgium and other countries this month, during which roads and ports were blocked, and truck drivers attacked.“A number of heads of government here . . . understand the pressures that our farmers are under — whether it is increased energy costs or fertiliser costs or new environmental regulation,” said Ireland’s Premier Leo Varadkar as he arrived at the summit. “It has been layer on layer for farmers.”In joint conclusions, leaders said they had “discussed the challenges” to the agricultural sector and would look at ways to address the situation.Alexander De Croo, the Belgian premier whose government holds the bloc’s rotating presidency, said that among the measures being considered were ways to help farmers manage price fluctuations and cut their administrative burden.EU agriculture ministers had been asked to come up with a plan at a meeting on February 26, he said.In France, where farmers have been blockading motorways around Paris and throughout the country in recent days, Prime Minister Gabriel Attal announced a series of measures, including a pledge to rethink pesticide reduction targets and a potential import ban on fruits and vegetables treated with the insecticide thiacloprid, which is prohibited in Europe. Two of France’s main agricultural unions — FNSEA and Jeunes Agriculteurs — said the measures were enough to pause their actions.“We are calling on our networks [to] suspend the blockages and enter into a new form of mobilisation”, said JA president Arnaud Gaillot.France is the EU’s biggest agricultural producer and the bloc’s biggest recipient of subsidies from the near-€60bn annual Common Agricultural Policy.  The recently appointed French prime minister last week angered the Spanish government when he said he would tackle “unfair competition” from farmers in “neighbouring countries”. Several Spanish lorries were later seized by demonstrating farmers and their produce destroyed.Pedro Sánchez, Spain’s premier, said after the summit that he had raised the issue with French President Emmanuel Macron and “condemned the attacks on our drivers”. He said Spain applied the same laws as France.In Belgium, farmers have also blockaded the port of Zeebrugge and blocked some supermarket warehouses.“We need a fair price for our products,” said Pol Latinis, a Belgian dairy farmer at the demonstration.De Croo, who was joined by von der Leyen and the Dutch PM at a meeting with farming groups in Brussels on Thursday, called for calm: “Please don’t vandalise the city”, he said. Critics of the protests have pointed to the high level of subsidies and the influence that the farming lobby already holds over policymaking in Brussels and EU capitals.Varadkar and Macron are among leaders who have called for a halt to a trade treaty with Latin American countries in the Mercosur bloc, which includes Argentina, Brazil, Paraguay and Uruguay.Farmers say that policymakers have been hypocritical in negotiating a deal that would allow increased imports of beef, soyabeans and other products that are not subject to the same stringent environmental and welfare rules that they face in Europe.Copa Cogeca, the biggest agricultural lobby group in the EU, warned the commission on Wednesday that the Mercosur deal was “unacceptable for most EU farmers” and that a “push for getting the deal across the line will be perceived as a further provocation by the farming community”. Additional reporting by Henry Foy in BrusselsClimate CapitalWhere climate change meets business, markets and politics. Explore the FT’s coverage here.Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK and eurozone manufacturers said their supply chains deteriorated for the first time in a year in a sign of the wider disruption to trade caused by Red Sea attacks by Houthi militants, according to a closely watched survey published on Thursday.The supplier delivery times index, part of the S&P Global purchasing managers’ index (PMI) survey published on Thursday, fell below a score of 50 in both economies in January, reflecting that a majority of businesses are reporting lengthening delivery times for supplies to reach their factories.The delays to delivery times will add to fears that ongoing Red Sea disruption will create inflationary pressure on Europe’s economy and difficulties for European manufacturers struggling with weak demand. The survey is “definitely a sign that we are starting to see the Red Sea actually impact businesses in Europe, and in fact quite a lot earlier than we expected the impact to be”, said George Moran, an economist at Nomura.The result, the first time the index has fallen below 50 since January 2023 and its lowest level in 14 months, follows the decisions of most container ships to avoid passing the Bab el-Mandeb Strait, a maritime chokepoint linking the Red Sea and the Indian Ocean. Iranian-backed Houthi militants have stepped up attacks on vessels passing the strait en route to Europe via the Suez Canal since mid-October. The Red Sea route normally accounts for 15 per cent of total global sea trade, including 8 per cent of grain, 12 per cent of seaborne oil and 8 per cent of seaborne liquid natural gas.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Businesses in most countries in Europe reported a deterioration in their supply chains, including major economies like Germany, France, and Italy. Manufacturers in Greece, one of the EU states closest to the Suez Canal, were among the hardest hit, according to the survey. Some carmakers relying on rerouted vessels for components have already felt the impact, with Tesla in Germany, Volvo Cars in Belgium and Suzuki in Hungary halting certain vehicle production lines.Companies are also facing increased shipping costs as a result of the Houthi attacks. Freight rates from east Asia to the Mediterranean are up 290 per cent compared with early November, according to the Freightos Baltic index, with a similar growth in the Asia to north Europe route. “The attacks in the Red Sea are leaving their mark,” said Norman Liebke, economist at Hamburg Commercial Bank, which compiled the French survey together with S&P Global. He added, however, that the levels of decline in the index were “a far cry” from those seen during the pandemic, when widespread supply chain disruptions caused prolonged shortages of materials for manufacturers globally. Since the first Houthi attack on October 19, Red Sea traffic has dramatically fallen. In the seven days to January 28, trade volumes in the Bab el-Mandeb Strait, which vessels pass through to get to the Suez Canal from the Indian Ocean, were down 65 per cent compared with the end of October, according to IMF PortWatch, which provides real-time indicators of port and trade activity across the world.In some countries, such as the UK, the disruptions contributed to higher input costs in January.Rob Dobson, director at S&P Global Market Intelligence, said that UK businesses participating in the survey estimated that a minimum of 12 to 18 days could be added to some expected deliveries, “disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas”.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Many economists have raised concerns over the impact on the global inflation outlook from the crisis in the Red Sea.Oliver Rakau, economist at Oxford Economics, said that “disruption to shipping through the Red Sea now looks likely to keep transport costs elevated at least for the next few months”. He estimated that would add 0.3 to 0.4 percentage points to the eurozone headline inflation measure, with “the brunt of the impact coming in the second half of the year”.The overall inflationary risks “are not going to be massive,” said Moran at Nomura, because alternative delivery routes are available and disruptions are not occurring in a period of high demand.The impact of the events in the Middle East on consumer prices “has so far been limited,” said Andrew Bailey, governor of the Bank of England, on Thursday, “but that could change if trade disruptions continue and this poses an upside risk to our inflation projection”. More

(Reuters) – The Bank of Russia is likely to hold its key rate at 16% in February after five rate hikes in a row, as inflation pressure shows signs of easing, a Reuters poll suggested on Thursday. Double-digit interest rates are set to slow Russia’s economic growth this year. The economy contracted in 2022 as Moscow bore the brunt of sanctions in the wake of its invasion of Ukraine, but rebounded in 2023 as Western efforts to starve Russia of energy revenues proved fairly ineffective. Thirteen analysts and economists polled by Reuters expect the central bank to hold rates at its first meeting of the year on Feb. 16. Stubbornly high inflation, exacerbated by rouble weakness, high budget spending and labour shortages led the bank to hike rates by 850 basis points in the second half of last year.Mikhail Vasilyev, chief analyst at Sovcombank, said the central bank was likely to give a neutral signal. “We believe that the opportunity for lowering the key rate will open up only in the middle of the year (June or July), when inflation starts to slow down steadily,” he said. Inflation, which the central bank targets at 4%, is seen ending this year at 5.2%. That would follow annual inflation rates of 7.4% rate in 2023 and 11.9% in 2022. Inflation data in recent weeks has lowered the probability of another rate hike, CentroCreditBank economist Yevgeny Suvorov said.”But we do not rule out another increase, especially if the situation with exports continues to worsen and the exchange rate heads towards 100 (per dollar),” Suvorov said. “In this case, the central bank would have to move the rate to 18-19%.” Rouble weakness fuelled inflation in 2023. Analysts expect the rouble, currently trading at about 90 per dollar, to weaken to 93.5 over the next year, an improvement on the prediction in the previous poll.The rouble may strengthen in the short term to 87 per dollar, Vasilyev said.”The rouble is favoured by seasonally lower demand for foreign currency at the start of the year, mandatory foreign currency revenue sales for major exporters, high rouble interest rates and yuan sales from reserves as part of budgetary operations,” he said. Russia’s gross domestic product is expected to grow 1.7% this year, the poll showed, slowing from a rebound of around 3.5% in 2023 and still supported by hefty military spending. (Reporting and polling by Alexander Marrow; Editing by Andrew Heavens) More