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Monday, 11 May 2020

Enterprise Poll: CBE to leave interest rates unchanged in May 2020

ENTERPRISE POLL- CBE to leave interest rates unchanged when it meets this week: The Central Bank of Egypt will likely leave rates on hold for the second consecutive month when its monetary policy committee meets later this week, according to a poll of analysts conducted by Enterprise. Ten of 12 analysts surveyed expect the central bank to hold off on making further adjustments to rates after its record 300 bps emergency cut in March.

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%.

Not enough has changed since March to justify further intervention, Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, told us. “There have been no significant changes” since March and “there is no need for any action,” he said.

A cut risks putting pressure on the EGP by turning off the carry trade. Renaissance Capital’s Ahmed Hafez believes that the CBE will not risk placing further downward pressure on the EGP as the pandemic has hit tourism revenues where it hurts. Sigma Capital’s head of research, Abou Bakr Imam, echoed Hafez, noting that the bank will prioritize maintaining currency stability, especially after last month’s sell-off of government debt.

Expectations for higher inflation to squeeze real rates: Holding off on a rate cut will keep the real return on government treasury bills just a notch over 1%, HC Securities’ Monette Doss told us. While inflation is still within the central bank’s target of 9% (+/- 3%), Doss expects it to tick up to average 9.6% over the coming 12 months.

Further monetary stimulus would deliver little benefit due to demand slump: “Current monetary policy is already accommodative, and the space to add further stimulus is limited,” said Prime Holding’s Mona Bedeir. “The effect of a further cut in policy rates to boost demand and support sentiment and market functioning will be limited” amid a demand slump caused by the government’s lockdown measures and an uptick in unemployment, she said.

The dissident voice: Ahmed Abdel Naby, head of research at Shuaa Securities, sees the bank making a 50 bps cut to support economic activity through the slowdown. The small cut is unlikely to negatively affect foreign portfolio investments, he said.

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