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Sunday, 18 February 2018

CBE signals victory over inflation, cutting interest rates by 100 bps

CBE signals victory over inflation, cuts interest rates by 100 bps: The central bank’s Monetary Policy Committee cut interest rates by 100 bps at its meeting on Thursday, the first rate cut since the EGP float in late 2016. The MPC lowered its overnight deposit, overnight lending and main operations rates by 100 bps each to 17.75%, 18.75%, and 18.25%, respectively. The discount rate was also cut by 100 bps to 18.25%, the CBE said in a statement on Thursday (pdf). “[The cut] remains consistent with tight real monetary conditions; a necessary requirement to achieve the inflation target of 13% (±3 percent) in 4Q2018 and single digits thereafter.”

The base effect has kicked in: “Inflationary pressures have been contained, a consequence of tighter real monetary conditions. This has been evident by relatively tame monthly inflation figures, despite being affected by upward adjustments of regulated prices,” read the statement. Inflation had dropped for the sixth consecutive month in January, with annual inflation falling to 17.1% and core inflation easing to 14.35%. “Favorable base effects have been accelerating the decline of annual inflation rates since November 2017,” said the CBE.

GDP strength also factored in: The central bank noted that GDP continued to grow for the fifth consecutive quarter, culminating in a rate of 5.3% in 2Q2017-18, “the highest economic growth since 2010.” The CBE attributed this growth to higher foreign demand for Egyptian opportunities since the float.

The pick-up of economic activity coincided with the continued narrowing of the unemployment rate, said the CBE. The unemployment rate in 3Q2017 was 11.9%, according to CAPMAS. The unemployment rate dropped to 11.3% in 4Q2017 from 12.4% in 4Q2016,CAPMAS announced on Thursday, as per Reuters. The unemployment rate in 3Q2017 was 11.9%, according to CAPMAS.

Economists hail the beginning of Egypt’s easing cycle: “A 1% cut is a great signal for investors that the tightening of monetary policy has ended and also a conservative approach which is highly needed in order to test market activity moving forward,” CI Capital Asset Management economist Noaman Khalid told Reuters. He said he expected another cut of 100 basis points at the bank’s next policy meeting, scheduled for March 29. Capital Economics believes that the easing cycle is likely to result in sharper interest rate cuts than most anticipate. “We expect an additional 650 bp of rate cuts by the end of 2019,” the firm said in a research note on Friday (pdf).

The carry trade still looks attractive: Others are looking to the US Fed to see if Egypt’s debt will remain attractive in light of global market turbulence. “The main concern is whether Egypt will continue to be an attractive destination for portfolio investments, particularly if the Federal Reserves also raises rates in the coming months,” said Bloomberg’s Economics’ Ziad Daoud. Average yields on Egypt’s debt dropped to 15% prior to the rate cuts, which some argue is still very attractive. “The carry trade in Egypt remains very attractive,” said Brett Rowley, Managing Director at TCW Group, which currently holds Egyptian debt.

Industry is looking for further rate cuts to unlock capex spending, members of the Federation of Egyptian Industries (FEI) tell state-owned Ahram Gate.

Bye-bye, 20% CDs: The three largest state-owned banks announced yesterday that they would stop issuing their infamous 20% CDs. Banque Misr will be offering 17% CDs with one-year maturity, down from 18 months, Chairman Mohamed El Etreby tells Al Mal. The National Bank of Egypt and Banque du Caire also followed suit. The three also lowered yields on 16%-yielding Platinum CDs by 100 bps. Banque du Caire will begin issuing CDs offering 15% today, said the bank’s Vice Chairman Amr El Shafei.

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