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Sunday, 24 March 2019

Enterprise poll: CBE could cut rates by up to 100 bps this Thursday

SURVEY- CBE could cut key interest rates this Thursday: The Central Bank of Egypt (CBE) could cut its key interest rates by 50-100 bps when its Monetary Policy Committee meets this Thursday, six out of 10 economists surveyed by Enterprise said. Respondents cited the EGP’s recent appreciation as well as steady inflows in portfolio investment. “Fundamentals have improved further; the EGP appreciation, portfolio inflows, the Fed maintaining rates and Egypt’s upgrade to B+ [by Fitch Ratings] are additional supporting factors to cut policy rates,” said Hany Farahat, senior economist at CI Capital, who called last month’s unexpected rate cut of 100 bps. The CBE cut its overnight deposit and lending rates by 100 bps last month to 15.75% and 16.75%, respectively, citing positive indicators, including lower inflation and unemployment.

The EGP hit a two-year high against the greenback this month due in part to the central bank’s scrapping in December of its parallel repatriation mechanism, which had kept a portion of foreign currency inflows from entering the banking system. The mechanism was put in place during the USD shortage crisis to reassure foreign investors by allowing them to repatriate their USD from the country at any point.

Would a cut drive the carry trade away? Economists think not.Foreign holdings in Egyptian treasuries jumped to USD 15.8 bn by the end of February, up from USD 13.36 bn at the end of January, signaling an end to an outflow trend that kicked off in April last year amid an emerging-market slump. “Another 1% cut will not drive portfolio investors away or make the local debt less attractive. We have very positive feedback from debt investors, despite February’s cut,” said Pharos Holding’s head of research Radwa El Swaify.

A cut would also compliment the government’s new debt strategy, El Swaify and veteran economist Hany Tawfik pointed out.

Don’t forget the Fed: The US Federal Reserve left interest rates on hold last week with the majority of central bank officials hinting rates could remain unchanged throughout 2019 to avoid an economic slowdown. It was good news for EM, because (in general) higher rates in the US = outflows from emerging markets.

A surge in inflation in February prompted almost half of the economists we surveyed to predict the CBE will leave rates on hold this Thursday. Four economists saw the CBE delaying its easing cycle on expectations that inflation would experience a seasonal surge during Ramadan, followed by a further increase following planned energy subsidy cuts in July. “We think the CBE will keep its rates unchanged in the coming period until the expected inflationary pressure following Ramadan, Eid and the planned subsidy cuts before the new fiscal year eases. We could see rate cuts by the end of 3Q2019 or the beginning of the fourth quarter,” said Multiples Group’s Omar El-Shenety.

Annual headline urban inflation jumped to 14.4% in February compared to 12.7% in January while annual core inflation, which excludes volatile items such as food and fuel, shot up to 9.2% compared to 8.6%. The state statistics agency said the increase came as a result of a jump in the price of vegetables, meat and chicken. Household utilities and transportation also contributed to the unexpected jump.

Global oil prices climbing are also a concern, added EFG Hermes’ Mohamed Abu Basha. “We’re expecting rates to remain on hold, largely due to the elevated inflation reading in February. On the margin, oil prices are slowly moving up, hitting nearly a five-month high.”

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