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Wednesday, 1 April 2020

Enterprise Poll: CBE to leave rates on hold in April meeting

ENTERPRISE POLL- CBE to leave rates on hold tomorrow: The Central Bank of Egypt is likely to leave interest rates on hold when its Monetary Policy Committee meets tomorrow, according to a poll of analysts conducted by Enterprise. Ten of 11 analysts polled expect the bank to leave interest rates unchanged after slashing rates 300 bps in an emergency cut barely two weeks ago. The bank said the move was “preemptive” to support the economy through the covid-19 pandemic.

Where rates stand now: The CBE’s overnight deposit rate is at 9.25% and the lending rate is at 10.25%. The main operation and discount rates are both at 9.75%.

The central bank’s monetary policy committee has made clear that it’s prepared to cut rates if necessary: During the announcement of its biggest-ever rate cut on 16 March, the central bank said that it “will not hesitate” to make further cuts if needed, a point reiterated earlier this week by Governor Tarek Amer.

That time is not now, analysts say:

Central bank to wait and see the effects of its emergency cut -EFG Hermes: The CBE will likely wait and see how the emergency rate cut impacts prices and how the rest of the world responds to the pandemic, Mohamed Abu Basha, chief MENA economist at EFG Hermes, told us. “Nothing has changed since [the emergency rate cut] and the government is gradually rolling out more measures to curb the spread of covid-19, but without taking drastic measures that could prompt the CBE to cut rates,” he said.

Inflation could tick up in the coming months: HC Securities’ Monette Doss expects the central bank to hold off on making another cut because of the likelihood of inflation increasing over the coming months. The hoarding of staples and pharma products prompted by the 7pm-6am curfew, potential production disruptions during the lockdown, and high demand during Ramadan will see annual inflation peak at 11.45% by December, she said. Inflation slowed from 7.2% in January to 5.3% in February, outside the lower bound of the central bank’s 9% (+/-3%) target range.

“Current risk levels also discourage further rate cuts,” Doss said, noting the rise in Egypt’s five-year credit default swap (CDS) spread and the demand for higher yields in the bond market. The price of five-year CDS (basically the cost of insuring Egypt’s debt) surged to 650 bps from 258 bps in the third week of February, reflecting growing anxiety about the country’s creditworthiness as well as nervousness on the part of investors over global developments. In the bond markets, yields in the primary market have only dipped slightly despite the CBE making a 300 bps rate cut.

The CBE won’t want to give foreign investors more reason to dump bonds: The central bank will leave rates on hold to ease pressure on the EGP amid a sell-off in local-currency bonds, said Abou Bakr Imam, head of research at Sigma Capital. Leaving rates unchanged is probably not going to stop portfolio investors from selling, counters Ahmed Hafez, head of MENA research at Renaissanceذ Capital, who suggested outflows will continue until global markets stabilize.

Capital Economics takes the contrarian view: The firm, which last week forecast the economy to contract 1.3% this year, thinks the CBE will go ahead with another rate cut tomorrow. “With central banks globally loosening policy further since [the emergency rate cut] and inflation pressures in Egypt under control, the CBE is likely to step up its policy support with another 100 bps cut in interest rates next week,” said James Swanston, MENA economist at Capital Economics. “As the full extent of the damage becomes clearer, we expect an additional 125 bps of monetary policy easing over the coming months.”

Don’t expect the recent cut to spark a capex splurge: Mohamed Saad, equity analyst at Shuaa Capital, said that despite interest rates falling to pre-float levels, most businesses seeking credit are looking for short-term loans to maintain cash flow and keep their operations running.

It’s a fine line for the CBE to walk in a time of global uncertainty: Cut rates and you do two things: Reduce the cost of borrowing for government (giving it more room for stimulus spending to keep the economy going — without completely nuking its budget deficit target) and encourage individuals and companies alike to put cash to work rather than letting it sit in bank accounts earning high interest. On the other hand, high interest rates keep Egypt attractive to the carry trade in a no-interest world.

No further cuts before the end of the year? Abu Basha, who originally forecast 200 bps of cuts through 2020, said it is unlikely that the central bank will make another rate cut until the end of the year.

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