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Monday, 11 February 2019

January inflation inches up, economists expect rates to remain steady on Thursday

Expect the CBE to leave interest rates on hold this Thursday after inflation rises slightly in January: Egypt’s annual headline urban inflation rate increased slightly to 12.7% in January compared to 12% the previous month, according to a central bank statement (pdf) out yesterday. Monthly inflation also rose to 0.4% from 0% in December. Annual core inflation, which excludes volatile items such as food and fuel, stood at 8.6% in January, up from 8.3% in December.

Rising vegetable prices were to blame: CAPMAS figures show that prices of food and beverages rose 6.8% y-o-y in January, driven by a surge in the cost of vegetables. Shuaa Securities said in a research note that weather patterns will continue to cause volatility in the price of vegetables in the short term, impacting headline inflation rates. Still, investment bank sees little chance of major upward inflationary pressure in the months to come.

Enterprise poll of economists sees CBE holding interest rates on Thursday: The Central Bank of Egypt will leave its key interest rates on hold when its Monetary Policy Committee meets on Thursday, nine out of 11 economists analysts surveyed told Enterprise. Rate waters with whom we spoke said they expect the central bank to leave its overnight deposit and lending rates at 16.75% and 17.75%, respectively, at the February 14 meeting.

There’s no consensus about when rates might come down, but some predicted the easing cycle could begin as early as March. Pharos Holding head of research Radwa El Swaify expects the CBE to leave rates on hold on Thursday, but said a 100 bps cut at the March meeting is possible should inflation remain within the bank’s target range and portfolio inflows remain strong. Renaissance Capital Chief Global Economist Charles Robertson is of the same view, saying that while rates will likely remain unchanged, a “small” cut is not entirely out of the question.

Inflationary pressure from subsidy cuts could delay cut until 2H2019: Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, the easing cycle would likely begin after the next round of subsidy cuts set for mid-2019. “An immediate reaction from the CBE to inflation readings or external factors is not recommended. It should wait until it’s sure about the stability of emerging markets, global oil prices as well the Fed’s next move,” he added. HC Securities, meanwhile, said in a research note that it sees these renewed inflationary pressure postponing the monetary easing cycle until 2020, when it expects to see a total rate cut of 500 bps.

EGP stability and keeping debt as attractive to portfolio investors will weigh heavily on policymakers’ minds: Multiples Group’s Omar El-Shenety says rates could start coming down only in 3Q2019, ensuring portfolio inflows are strong enough to keep the EGP stable in the meantime. “The CBE is keeping its eye on the stability of the exchange rate, which requires keeping local debt attractive to portfolio investors in the midst of emerging market turmoil,” El-Shenety said.

So, why do two economists expect a rate cut on Thursday? Hany Farahat, senior economist at CI Capital, expects the CBE to cut rates by 25-100 bps in this week’s MPC meeting. “Recent dynamics support a rate-cut, including the fall in inflation, reversal in foreign outflows, IMF loan disbursement, recent USD:EGP appreciation, and progress with upcoming eurobond issuance, which are factors also supporting a lower premium on the EGP,” Farahat said. “A cut at this point could even encourage higher inflows into treasuries, as fixed income investors are incentivized to lock-in high yields before further drops in policy rates this year,” he added. Shuaa Securities senior economist Esraa Ahmed also expects a 100 bps rate cut on Thursday, noting that inflation is within the CBE’s range and also pointing to the US Federal Reserve’s decision to slow down the pace of monetary policy tightening. Falling global oil prices will also be a factor in the MPC’s thinking, she said.

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