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Sunday, 19 May 2019

Enterprise poll: Central Bank of Egypt to maintain rates despite drop in April inflation

SURVEY- CBE to leave key interest rates on hold this Thursday: The Central Bank of Egypt (CBE) will likely leave key interest rates on hold when its Monetary Policy Committee meets this Thursday, according to all 12 economists polled by Enterprise. Respondents cited the likely impact on inflation of upcoming cuts to subsidies for fuel and electricity. “We think the CBE will refrain from taking any action now that we’re getting closer to the liberalization of fuel prices this summer,” EFG Hermes’ Mohamed Abu Basha said. The CBE cut its overnight deposit and lending rates by 100 bps in February to 15.75% and 16.75%, but left them on hold at its last meeting in March.

Indicators are good: “April's inflation was good, but not to the extent of a cut ahead of the next round of subsidy cuts. Unemployment continues to drop and GDP growth is holding up well, so I don't think the CBE will view monetary action as needed. The only thing in favor of a cut is the stronger EGP,” Renaissance Capital Head of MENA Research Ahmed Hafez said. Annual headline inflation fell to 13% in April from 14.2% in March, potentially as a result of discounted food items the government released in the market ahead of Ramadan. Unemployment fell to 8.1% in 1Q2019, down from 8.9% in 4Q2018, the state statistics agency said earlier this month.

Look for inflation to rise in May and June on the back of Ramadan spending and planned subsidy cuts, analysts said. “We expect monthly inflation to rise in May as a result of higher consumer demand during Ramadan. Moreover, we estimate fuel prices to rise 15%-25% in June-July, compared to average fuel price increases of 31%-42% for octane and diesel in FY2017-2018, resulting in higher monthly inflation in June and July,” HC’s Sara Saada said.

So, when will the central bank go back to rate cuts? Look for easing to resume toward the end of this year, economists predicted. “I still expect the CBE will resume easing in Q4,” said CI Capital’s Hany Farahat.

Could we see a cut this week anyway? Only if you squint the right way: “There is room,” said Beltone’s Alia Mamdouh. “But the most likely scenario remains a 100 bps cut in rates by the end of the year, accounting for the expected inflationary repercussions of the wider implementation of the fuel indexation mechanism.”

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