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Sunday, 21 June 2020

Enterprise Poll: Central Bank of Egypt to leave rates on hold at June 2020 meeting

ENTERPRISE POLL- CBE seen leaving rates on hold this Thursday for third consecutive meeting: The Central Bank of Egypt will leave interest rates unchanged when its monetary policy committee meets this Thursday, according to an Enterprise poll. Nine out of the 10 analysts and economists surveyed expect the central bank to leave rates where they are for the third straight meeting after making an historic 300-bps rate cut in response to the covid-19 pandemic.

Where do rates stand currently? 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 main mission right now is to use rates to support the EGP lest we start importing inflation, several analysts say. “We expect the CBE to hold its policy rates at the upcoming meeting because of the limited effect of any further rate cut and the need to keep the real yield on domestic debt instruments lucrative enough to compensate for the expected EGP depreciation,” said Mona Bedeir, senior economist at Prime Holding. Ahmed Hafez, head of MENA research at Renaissance Capital, also pointed out the currency easing and said that the central bank will not want to turn off foreign investors with lower yields just as they’re starting to return to EGP-denominated bonds after three months of heavy outflows thanks to covid.

The currency has been proving more flexible in recent weeks, easing almost 3% over the past month to EGP 16.11 to the greenback at the end of last week. The consensus among analysts seems to be that the trend will continue, but how far remains the subject of debate. Radwa El Swaify, head of research at Pharos, sees the EGP averaging 16.50 against the greenback during 2020, at the low end of the range mooted by global investment banks, which in recent days have forecast the currency to stand anywhere between 16.50-17.50 by the end of the year.

Depreciation of the EGP and the impact of covid will push up prices in the months ahead: Despite inflation falling to six-month lows in May, the central bank will hold off on making an additional rate cut this month, mindful of the potential for price growth to accelerate in the months ahead, several analysts said. “Current price levels also reflect lower demand compared to relatively higher consumption levels during the month of Ramadan. Going forward, we remain cautious as recent EGP devaluation of around 3% in addition to possible supply disruptions resulting from lower international trade could lead to some price increases,” said Monette Doss, chief economist at HC Securities. “We expect inflation to average 8.4% over the remaining months of 2020, well within the CBE’s target of 9% (+/- 3%) for 4Q2020.“ El Swaify sees inflation rising from 4.7% currently to 7-7.5% by the end of the year.

What will the CBE do next? Analysts are divided on how the central bank will act during the remaining months of the year. While El Swaify and Bedeir have both called an end to the easing cycle this year, others are maintaining a dovish outlook going forward. Capital Economics sees another 225 bps of cuts between now and December, bringing the overnight deposit rate down to 7%. “Subdued” inflation and expectations for further funding from the IMF will make the environment more conducive or further easing, MENA economist James Swanston said. Likewise, economist Hany Genena sees another 100-200 bps of cuts coming over the next six months, citing near-zero interest rates in the US, continued weakness in some sectors of the Egyptian economy, and strong support for the currency through the high-interest EGP-denominated savings certificates launched by Banque Misr and the National Bank of Egypt in April.

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