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Sunday, 22 December 2019

Enterprise poll: Central Bank of Egypt to keep rates on hold in final meeting of 2019

SURVEY- Economists expect CBE to keep rates on hold in final meeting of 2019: The Central Bank of Egypt (CBE) will leave interest rates on hold when its Monetary Policy Committee (MPC) meets this Thursday, according to seven of 10 economists polled by Enterprise. This is the lowest rate of consensus we’ve seen among economists we’ve surveyed since March of this year. Pharos Holding, Shuaa Securities, Prime Holding, Beltone Financial, Renaissance Capital, EFG Hermes, and veteran economist Hany Tawfik all see the MPC keeping rates steady, while Signet, Sigma Capital, and HC Securities think we could see a rate cut.

The CBE cut interest rates by 100 bps last month, bringing the overnight deposit rate to 12.25% and its lending rate to 13.25%. The main operation and discount rates were both cut to 12.75%.

December inflation could accelerate, encouraging CBE to play it safe: The economists cited the slight increase in November’s inflation rate — the first increase in six months — and largely expect inflation inflation to edge up again in December due to the dissipation of the favorable base effect. Inflation figures for December won’t be out until after the MPC meets.

Where is inflation expected to stand? Pharos Holdings’ head of research Radwa Elswaify expects December’s annual inflation reading to come in at 6%. Shuaa Senior Economist Esraa Ahmed also sees a 6-6.5% inflation reading next month, and expects inflation to remain in that range in 1Q2020. Prime Holding Senior Economist Mona Bedeir sees inflation closing 2019 at c.7%, which she notes is below the central bank’s initial targets of 9% (±3%). Beltone’s Alia Mamdouh also says inflation will remain within the CBE’s targets, particularly in light of the EGP’s recent strengthening against the USD.

Keeping rates on hold would be a strategic move for the CBE at this point in the easing cycle, before resuming the cuts as of 1Q2020, EFG Hermes’ Mohamed Abu Basha says. By maintaining rates, the CBE will be able to better assess the impact of the three consecutive rate cuts it enacted earlier this year before exhausting its toolkit. Abu Basha also believes the CBE will be unwilling to act on interest rates without December and January’s inflation data. Bedeir and Elswaify are of the same mind, saying that as the favorable base effect wears off, the CBE will be less able to accurately predict where December’s inflation levels will come in. Bedair expects the central bank to deliver a total of 200-300 bps in rate cuts over the course of 2020, with a 100 bps cut in 1Q2020.

There’s also the Fed and rising oil prices to take into account: Elswaify also points to the US Federal Reserve keeping interest rates on hold at its last meeting as a key factor for the CBE to keep in mind this week. Meanwhile, Ahmed notes that oil prices are heading towards USD 65 / bbl, which will likely push the central bank to favor keeping rates where they are.

It’s not the hold we want, but it’s the hold we need: “I expect a hold, although I hope to see a 100 bps cut. The CBE will likely keep rates steady to maintain Egypt as an attractive destination for portfolio investors,” Tawfik tells us. He sees this, not inflation rates, as the most important driver behind the MPC’s upcoming decision. Tawfik expects around 300 bps in rate cuts throughout next year, including 75-100 bps in 1Q2020.

Dissenters see enough room for a cut without upsetting the carry traders: Even with last month’s uptick in inflation, “Egypt still enjoys a very high and favorable real interest rate for portfolio investment,” Sigma Capital’s head of research Abu Bakr Emam says. “We expect increased inflows into the Egyptian debt market over the coming few months as it continues to offer high positive real interest rates compared to other emerging markets such as Turkey,” HC Securities Chief Economist Monette Doss says. Emam and Doss both predict a 50 bps cut on Thursday.

Gov’t debt burden could also provide impetus for faster easing: Economic think tank Signet’s Angus Blair says the pickup in inflation won’t put much of a damper on the easing party, and expects the central bank to squeeze in a 100 bps cut. Blair points to the government needing lower interest rates to lower its debt burden and increase its fiscal maneuverability as a primary concern for the CBE.

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