Egypt Boosts Deposit Auction Size Amid Higher Inflation Bets

Egypt increased deposit agreement sales by 64 percent today as the central bank seeks to absorb excess funds before a government report that may show inflation accelerated. The benchmark eurobonds advanced.

The central bank accepted bids for 23 billion Egyptian pounds ($3.4 billion) of the contracts, compared with 14 billion pounds on April 2, according to its data on Bloomberg. It received total bids valued at 29.3 billion pounds. The contracts allow lenders to deposit funds for a week at a fixed annual interest rate of 10.25 percent.

The auction comes a day before Egypt’s statistics agency releases urban consumer price data for March that may show annual inflation accelerated to 8.8 percent from 8.2 percent a month earlier, the median estimate of four economists surveyed by Bloomberg shows. The central bank raised benchmark interest rates last month after the inflation climbed for three months amid a slump in the local currency.

“Effectively, this is about constraining excess liquidity,” Neil Shearing, chief emerging markets economist at London-based Capital Economics Ltd., said by phone. “In a perfect environment, reducing the supply of money in the system would lower inflation. But there are much bigger issues for inflation in Egypt, like the weakening pound and the effects controls on access to foreign currency are having on the country’s ability to import staple goods.”

Weakening Pound

The Egyptian pound weakened as the central bank introduced currency auctions to limit lenders’ access to U.S. dollars in a bid to conserve foreign reserves. The pound has depreciated 9.6 percent to 6.8491 a dollar since the auctions started Dec. 30. The currency traded at 7.85 a dollar on the unregulated market last week, according to the average of three dealers interviewed by Bloomberg.

The country’s $1 billion of 5.75 percent notes due in April 2020 have rallied this month as the government holds talks in Cairo with the International Monetary Fund for a $4.8 billion loan.

The yield on the notes fell for a fifth day, dropping eight basis points, or 0.08 of a percentage point, to 7.42 percent as of 4:21 p.m. in Cairo. The yield plunged 77 basis points last week after climbing 127 basis points in March, according to data compiled by Bloomberg.

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