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Sunday, 18 August 2019

Enterprise Poll: CBE could cut interest rates on Thursday

SURVEY- CBE could cut key interest rates this Thursday: The Central Bank of Egypt (CBE) could finally cut benchmark interest rates by between 50-100 bps when the Monetary Policy Committee (MPC) meets this Thursday, according to six out of eight economists polled by Enterprise. Easing inflation, coupled with the US Federal Reserve and several emerging market central banks cutting interest rates, relieves much of the pressure on the CBE and leaves room for a cut, according to the economists. Pharos’ Radwa El Swaify forecasts a 100 bps cut due to falling inflation, but said that there is a chance that the CBE could wait until September’s meeting to ride out the residual effects of July’s subsidy cuts. AbouBakr Emam, head of equity research at Sigma Capital, anticipates a more cautious rate cut due to the inflationary effects of the back to school season and energy price hikes, as well as the current instability in the global markets. The MPC last cut interest rates in February, when the overnight deposit and lending rates were reduced by 100 bps to 15.75% and 16.75%, respectively.

Inflation figures a major boon for the doves: Egypt’s annual headline inflation rate dropped against expectations to 8.7% in July from 9.4% in June, its lowest recording in four years, while core inflation fell to 5.9% in July from 6.4% in June. The low readings came despite the government raising fuel prices between 16% and 30% in July and new electricity subsidy cuts coming into effect. “This shows that prices are under control which gives space for the CBE to resume monetary easing and boost economic growth,” HC’s Sara Saada said.

Global conditions might not stand in the way of a cut: Shuaa Securities’ Esraa Ahmed said that there would be little risk of capital flight if the CBE lowered rates during the current volatility in the global financial markets. “There is no pressure from the fear of losing portfolio investors in debt because investors will go the highest yield available rather than stock markets with all that’s happening internationally, the ongoing trade wars and recession fears. This could push investors toward debt in moderate risk EMs,” she said. And the US Federal Reserve’s recent rate cut also reduces the risks of outflows from Egyptian domestic data, Saada said.

Not everyone agrees though: “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 said. And Mona Bedeir, senior economist at Prime Research, 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. “The lingering global risk and renewed fears of the deterioration in risk sentiment in emerging markets might precipitate the CBE to remain patient in the upcoming meeting,” she told us.

And there are a number of other reasons why the CBE may hold off on making a cut: El-Shebiny said that weak FDI inflows, the risk of a financing gap, and geopolitical risks are all factors that could tempt the MPC away from making a cut this month.

Beyond August: Last month’s unexpectedly low inflation figures have raised expectations that the CBE will accelerate easing during the final months of the year, with Pharos now predicting that 200-300 bps worth of cuts will be made before the end of the year. This will please businesses, who have called for interest rates to return to pre-floatation levels to encourage investment.

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