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Thursday, 13 February 2020

CBE to ease off rate cuts this year in a bid to support strong carry trade -EFG Hermes

CBE to ease off rate cuts this year in a bid to support strong carry trade -EFG Hermes: The Central Bank of Egypt is likely to slow its easing cycle this year as it looks to maintain the strength of the carry trade and support the EGP, according to a research note from EFG Hermes picked up by Bloomberg. Tumbling inflation in 2H2019 allowed the central bank to cut interest rates by 450 bps last year, but EFG analysts Mohamed Abu Basha and Mostafa El Bakly think we’ll be lucky to see a quarter of that in 2020, writing that bank officials will look “to continue providing decent real rates for carry traders, who are important to maintain a healthy outlook for the EGP.”

Policymakers could look at other options to stimulate borrowing: The CBE could turn to open-market operations to inject liquidity into the banking system, allowing it encourage lending and investment while scaling back its easing cycle. In light of this the investment bank is only giving a 50% chance of a cut when the CBE meets next week. Shuaa, meanwhile, says in a separate note (pdf) that the time is ripe for the CBE to begin cutting down its reserve requirement ratio (RRR) for bank deposits, which would allow commercial banks to increase money supply in the market. The prospect of scaling back banks’ RRR was floated as a possibility by several economists back in October.

The EGP surge against the greenback has accelerated since the turn of the year, rising from EGP 16.00/USD to EGP 15.66 — a level not seen since 17 November 2016, two weeks after the government floated the currency. The currency has risen around 13% against the USD since the beginning of 2019.

This has been driven by a surge in foreign inflows into local-currency bonds, which have risen 3.7% against the USD this year, around four times the average return in emerging markets, according to Bloomberg Barclays EM indices.

Expect the EGP to 15.00 by year’s end -DB: Deutsche Bank has forecast the EGP to fall to 15.50 against the USD by the end of 1H2020 and 15.00 by the end of the year in a report picked up by the local press.

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