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Thursday, 22 August 2019

CBE likely to cut rates today -economists

There’s a growing consensus for a rate cut today: The Central Bank of Egypt (CBE) will cut its benchmark overnight deposit rate by “at least” 100 basis points when it meets later today as easing inflation and a stable EGP offset concerns of a sell-off, according to 10 of 12 analysts polled yesterday by Bloomberg. The other two anticipated the CBE will hold. Three-quarters of economists we surveyed this week also see the central bank easing (with most anticipating a 100 bps cut). Ten out of 13 economists polled by Reuters this week expect a cut, with seven forecasting a 100 bps cut, three expecting a deeper 150 bps cut, and three forecasting a hold. 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.

Joining the chorus is Naeem Holdings, which earlier this week had expected the CBE to keep rates on hold. “We observe that prices of some essential food items (in particular, vegetables) continue to decline in August, which should give the CBE comfortable room to cut rates,” Allen Sandeep told Enterprise. Sandeep now believes the CBE could cut rates by as much as 200 bps.

The carry trade shouldn’t be an issue: Egypt would remain one of the most attractive carry trades in the world, even after a rate cut, EFG Hermes’ Mohamed Abu Basha, pointed out. Interest rates would still be some of the highest in emerging markets, providing “a margin to cut the interest rate without halting or affecting the competitiveness of the carry trade,” he said.

The country’s reform story is solid enough to point the CBE in the direction of a rate cut, says Doug Bitcon, fund manager at the regionally-focused Rasmala Investment Bank, in a separate Bloomberg interview (watch, runtime: 4:15). The budget deficit declining to 8.2% of GDP, the current account deficit narrowing to nearly 1%, and the economy growing at a near-5% clip are a few examples of the positive indicators. Bitcon, too, says that the risk of a currency sell-off is low, and that Egypt will remain the region’s most attractive carry trade following a rate cut. Foreign holdings in Egyptian treasury bonds have risen significantly so far this year, coming in at around USD 19.2 bn as of mid-June compared to USD 13.1 bn in January.

Could Egypt’s central bank cut rates by up to 550 bps until next year as some expect? This would depend on the evolution of inflation over the next few months and how the recent subsidy cuts will impact prices, Bitcon said.

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