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Sunday, 16 February 2020

Enterprise Poll: Analysts divided over which way the CBE will go with interest rates

SURVEY- Analysts are split down the middle on whether the Central Bank of Egypt will resume its easing cycle when it meets on Thursday. Six out of 12 economists we polled last week expect the central bank’s Monetary Policy Committee (MPC) to cut rates by 50-100 bps and five forecast it to hold fire in the face of uncertainty surrounding the trajectory of inflation and the impact of the coronavirus. Mohamed Abu Basha, head of EFG Hermes’ macro unit, was on the fence about whether the CBE would cut or leave rates unchanged.

The CBE left rates on hold last month, citing a pickup in inflation, a rise in unemployment, and volatility in the oil market. This means that the overnight deposit rate remains at 12.25% and the lending rate at 13.25%. The main operation and discount rates both stand at 12.75%.

There’s a lack of agreement on how recent inflation figures will factor into the CBE’s decision. The five respondents predicting a cut said that the central bank would prioritize other concerns, given the fact that inflation remains within the central bank’s 9% (+/- 3%) target range. Rising food prices pushed inflation up to 7.2% last month, an increase of just 0.1 percentage points from the month before. Others — such as Beltone’s Alia Mamdouh — believe that it will wait until it sees signs of calming inflation before resuming the easing cycle.

And don’t forget last week’s suggestion that leaving rates where they stand would be good for the carry trade and, by extension, for Egypt’s foreign exchange position.

Deteriorating private sector business activity a source of concern for the CBE: The central bank is likely to react to last month’s poor PMI figures and cut rates in an attempt to support business activity, the dovish analysts contend. Non-oil private sector business activity sank to three-year lows last month, marking six consecutive months of contraction. “The fall in the PMI survey shows that the private sector needs some stimulus,” said the chairman of economic think tank Signet, Angus Blair, who predicts a 100 bps cut. Bassem Kamar, lead economist for the south and east Mediterranean at the European Bank for Reconstruction and Development, forecasts a 50 bps cut for similar reasons. “The central bank needs to encourage the private sector to invest in order to play the role assigned to it in economic growth and job creation, which requires a reduction of interest on lending to boost corporate capital expansion,” he said.

But the CBE will also have to weigh the potential fallout from the coronavirus: Several analysts said the central bank is not likely to risk cutting interest rates while the full impact of the coronavirus remains unknown. “I expect that the CBE will tend to stabilize until the study of the impact of the coronavirus on the investment climate and trade exchange with China,” said Sara Saada, senior economist at CI Capital. Some surveyed said there’s a risk of portfolio investment exiting emerging markets in light of the USD’s rise amid the fears of the virus, so holding off on a rate cut would make Egypt stickier.

There’s debate about just how much the trade disruption caused by the virus will affect inflation: Professor of Economics at Cairo University and former IMF and World Bank advisor, Fakhry El Fiky, warns that there is a risk of inflation being imported if trade with China slows. “If merchants in Egypt resort to storing Chinese goods and raising their prices, this will lead to an increase in inflation in the coming months,” he said. Hany Genena, head of research at Prime Holdings, played down the threat, suggesting that while local firms would experience “pressure” for the coming 1-3 months, there is little risk of inflation caused by businesses pushing up the prices of Chinese goods. “This will not lead to a sustained shock to inflation as demand is naturally low due to weak liquidity among consumers,” he said.

Are the CBE’s recent initiatives a substitute for a rate cut? El Fiky, who thinks the CBE will opt to leave rates on hold, said that doing so would not risk restricting business investment due to the recent support given by the central bank to the tourism, industrial, and real estate industries.

What does this mean for interest rates over the longer term? Amr El Alfy, head of research at Shuaa, said that the twin uncertainties of the coronavirus and rising inflation will likely mean that the central bank holds off on further cuts until the second half of the year, when it is likely to cut by 200 bps before 2021. However, he does not rule out the possibility of a cut in April. Pharos’ head of research Radwa El Swaify, who was among the analysts to forecast a hold this month, sees the central bank following a “calmer policy” through 2020. She believes the CBE will cut by 200-300 bps this year, with the cuts most likely coming in April, June and August. Abu Basha expects rates to fall by 150-200 bps by the end of the year, calling another cut “inevitable.”

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