Back to the complete issue
Sunday, 27 September 2020

Against expectations, Central Bank of Egypt cuts interest rates by 50 bps

Central Bank of Egypt surprises with first rate cut since March: The Central Bank of Egypt (CBE) cut interest rates by 50 bps on Thursday — the first since the emergency 300 bps rate cut in March, the central bank said in a statement (pdf).

The move was a surprise to most: All 11 economists and analysts we surveyed last week predicted the bank would leave rates unchanged to support the EGP and the all-important carry trade. In a research note out late last Wednesday, Arqaam Capital suggested however that there was a “decent chance” for a small rate cut as Egypt’s carry trade has been one of the most profitable among emerging markets for the carry trade, with double the risk-adjusted return on one-year t-bills offered by its EM peers.

Where rates stand now: The CBE’s overnight deposit rate is now at 8.75% and the lending rate is 9.75%. The main operation and discount rates are now at 9.25%.

Low inflation paves the way: “As incoming data continues to confirm the moderation of inflation expectations, the reduction of policy rates in today’s Monetary Policy Committee (MPC) meeting provides appropriate support to economic activity, while remaining consistent with achieving price stability over the medium-term,” the central bank said. Annual headline urban inflation decelerated to a 10-month low of 3.4% in August, while preliminary figures show real GDP growth in FY2019-2020 came in at 3.5%, the central bank said. Despite unemployment rising to a two-year high in 2Q2020, the bank sees “a gradual recovery in economic activity,” as indicated by key economic indicators stabilizing in July and August.

The CBE now expects inflation to fall on the lower end of its 6-12% target range in 4Q2020. Renaissance Capital had expected as much, saying in a research note earlier this month that inflation is expected to close out the year just below the inner band target, thanks to muted consumer demand. The firm had expected the CBE to take “measures” to nudge inflation up to remain within the targeted range, suggesting that one possible route would be canceling the 15% high-yielding certificates of deposit — a prophecy that was realized last week.

The decision to move towards monetary easing suggests that the CBE is not concerned about spooking the carry trade, Arqaam’s Noaman Khalid told Reuters. Foreign liquidity is also “relatively stable,” Beltone Financial said in a research note on Thursday. Remittances from Egyptians working abroad rose 11% in July against expectations, which has helped provide FX support amid low revenues from tourism and exports.

Pushing back on the EGP? “The central bank may have also wanted to push back against the recent appreciation of the EGP,” Capital Economics’ James Swanston wrote, noting that the EGP has appreciated by 1% against the greenback since the last MPC meeting.

A rate cut could also help spur capex borrowing and generally be “good news for businesses in terms of liquidity, which has been quite tight since the pandemic,” Naeem Brokerage’s director of research Allen Sandeep told Bloomberg. Our 2020 reader poll earlier this year had suggested that 46% of you wanted to see interest rates fall to around their current levels to unlock capex spending, but private demand growth is now the key to encourage capex borrowing, Beltone said.

Could we see more rate cuts? It’s unlikely in the short term, says EFG Hermes’ head of macroeconomic research Mohamed Abu Basha. While there’s room for more monetary easing, Abu Basha says the “uncertain external environment” makes it improbable that the CBE will push more cuts soon. Swanston thinks that the central bank will “remain cautious” in the months ahead, but is now forecasting rates to fall to 7% by the end of next year.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt; Hassan Allam Properties (tax ID:  553-096-567), one of Egypt’s most prominent and leading builders; and Saleh, Barsoum & Abdel Aziz (tax ID: 220-002-827), the leading audit, tax and accounting firm in Egypt.