CBE expected to follow global wave of interest rate cuts amid inflation drop

CAIRO – 22 August 2019: Amid a global wave of interest rates cut, decline of inflation rate to a four-year low, and the hovering prices of oil around $60 per barrel, Egypt's Central Bank (CBE) is expected to cut interest rates on Thursday's, August 22, meeting by around 100 basis points.
Senior Economist at SHUAA Capital Esraa Ahmed stated that the scene is exceptionally suitable for resuming the easing cycle with a 100bps cut, attributing this expectation to six main reasons.
The Monetary Policy Committee of the Central Bank of Egypt (CBE) kept the overnight deposit rate and the overnight lending rate on hold at 15.75 percent and 16.75 percent, respectively, during the fourth meeting of 2019, in July.
Capital Economics agreed with SHUAA saying that there is a high probability of a cut in interest rates after the MPC’s upcoming meeting.
Ahmed clarified these reasons include the drop of headline and core inflation rates at four-year lows, global monetary easing in advanced and emerging countries, and oil prices which is hovering around $60 for a barrel, in addition to the need to spur private sector and investment, as well as Suez Canal Investment certificates.
The Central Agency for Public Mobilization and Statistics (CAPMAS) announced earlier that Egypt’s annual consumer price inflation rose to 7.8 percent in July 2019, compared to 13 percent in July 2018. Moreover, annual core inflation rate declined to 5.9 percent in July 2019, from 6.4 percent in June 2019, according to CBE's report.
Core inflation discounts or strips out certain categories that are considered more volatile.
Capital Economics also clarified that the drop in inflation to a four year low YoY in July reinforces its view that the CBE will resume its easing cycle at its next meeting with a 100bp cut in the overnight deposit rate, to 14.75 percent, expecting an additional 100bp of cuts by year end.
"We see no need to wait for another inflation reading, because even if August goes up, it would be for seasonal reasons, i.e. Eid al-Adha which might produce an increase in the price of meat (a core food item)," Ahmed noted.
She added that the impact of the recent increase in cigarette prices on the overall index will be marginal, due to trivial weight assigned to the item (2 percent of the whole index).
"Even if August inflation readings were higher than those recorded in July, we think the real positive deposit rate, being at around 7 percent, is enough for a reasonable cut of 100bps with no worries," she stated.
According to Ahmed, the recent global developments pave the way for CBE to resume the easing cycle such as the Fed's cut, and ECB, New Zealand's cut, in addition to cuts by emerging markets including Turkey and India. "Rate cuts already taking place in EMs in specific shield the competitiveness of treasuries in Egypt should it cut rates itself."
Continuous normalization of interest rates is imperative as Egypt's economy cannot count much on FDIs, as global protective measures have hit capital flows hard, she added, stressing the need for promoting private investments to maintain a much-needed high growth rate.
Related to Suez Canal investment certificates, around LE 60 billion is expected to be paid back to holders of the Suez Canal investment certificates early September, which may affect the inflation rate. "However, we don't think this poses a high risk to inflation as we believe the greatest portion of the withdrawn funds will be reinvested in bank deposits at the highest rates possible."
In a survey conducted by Enterprise, six out of eight economists anticipated that CBE could finally cut benchmark interest rates by between 50-100 bps when the Monetary Policy Committee (MPC) meets this Thursday.
“Foreign investments in Egypt’s debt securities are important so the CBE may be obligated to keep rates high,” Mubasher International’s Head of Research Hisham El-Shebiny told Enterprise.
Also, Senior Economist at Prime Research Mona Bedeir said that although recent inflation data could enable the CBE to cut rates, recent EM volatility caused by the devaluation of the Yuan and events in Argentina may cause it to hang tight.
Moreover, 10 of 12 analysts surveyed by Bloomberg said that Policy Committee is expected to reduce the benchmark overnight deposit rate on Thursday by at least 100 basis points to 14.75%. " The other two see no change in borrowing costs."
“All macroeconomic indicators are pointing at an imminent rate cut,” Head of Research at Cairo-based Pharos Holding Radwa El-Swaify told Bloomberg. “However if the central bank decides to continue with a conservative monetary policy, we wouldn’t be surprised.”
Head of macroeconomic analysis at Cairo-based investment bank EFG-Herme Mohamed Abu Basha stated that the Egyptian pound’s current stability has combined with high interest rates to make the country a darling among bond investors hunting for yield.
"Egypt’s borrowing costs adjusted for inflation, currently among the highest in emerging markets, give authorities leeway to ease monetary policy," Abu Basha added to Bloomberg.
Furthermore, Seven out of 13 economists surveyed by Reuters said the bank’s monetary policy committee would cut overnight rates by 100 bps, which would bring the deposit rate to 14.75 percent and the lending rate to 15.75 percent.