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Sunday, 20 December 2020

Hold your horses

ENTERPRISE POLL- The Central Bank of Egypt (CBE) will leave rates on hold when its Monetary Policy Committee holds its final meeting of the year on Thursday, according to an Enterprise poll. All 10 economists and analysts we surveyed expect the central bank to hold off on further easing, citing rising inflation, the ongoing pandemic, and implications for the carry trade.

Where rates stand currently: The CBE’s overnight deposit rate is now at 8.25% and the lending rate is 9.25%. The main operation and discount rates are now at 8.75%. The central bank has so far cut rates by 400 bps this year, including a record 300 bps cut in March and 50 bps cuts at each of the last two meetings.

Wait and see: "The central bank will slow down before lowering rates again to assess developments in the global economy, global monetary policy, the pandemic and financial portfolio flows, as well as the impact of the 400 bps of cuts made during 2020,” says Radwa Swaify, head of research at Pharos.

Inflation on the rise: Most analysts cited the recent uptick in inflation in their forecasts, noting that while it remains below its 9% (+/- 3%) target range, the central bank will likely respond to the rise by leaving rates unchanged. Ahmed Hafez, head of MENA research at Renaissance Capital, notes that rising inflation over the past two months has primarily been in seasonal goods, and sees inflation averaging at 6% through 2021. Arqaam Capital’s Noaman Khalid sees inflation inching up until March and averaging at 7% in 2021, partially because of the base effect.

Do we care about Turkey’s big rate move last month? The Turkish central bank’s huge 475-bps rate hike last month could provide strong competition, according to Sigma Capital’s Abu Bakr Imam, who says that the central bank does not want to lose precious greenbacks.

Maybe not: HC Securities suggests that Egypt’s position as the preeminent EM darling isn’t under threat from Turkey, with its real, after-tax yield of 3.03% comfortably above Turkey, which is now at -1.6%. Egypt also has a lower credit risk profile, increasing the attractiveness of Egyptian paper vis-a-vis Turkey. Still, Ankara is expected to raise rates by another 150 bps when it meets on Thursday.

This is exactly where the CBE wants real rates, according to EFG Hermes’ Mohamed Abu Basha. “With the return of inflation to normal levels and with the reduction in the previous two meetings, the level of real interest has become in the range of 3%, which is the rate I think the central bank wants to maintain,” he says.

The carry trade can withstand significantly lower rates: The central bank could cut rates by another 250-275 bps and Egyptian bonds would still remain attractive to foreign investors, RenCap’s global chief economist, Charles Robertson, wrote in a note over the weekend.

‘Tis the season: The central bank may also want to hold off on making an adjustment at this time of year given the potential for a muted response during the holiday season, HC Securities says.

Another cut would soften the currency: Further rate cuts would push the EGP down to 16.50-17.00- to the greenback by the end of 2021, making the currency more competitive and avoiding large moves in the medium term, Robertson wrote.

Easing to resume early in 2021: The central bank is likely to resume its easing cycle early in 2021, according to several analysts. HC expects the CBE to make a 100-bps cut in 1Q2021, while RenCap predicts a total of 100-150 bps of over the next 12 months/

And further into the future: Beltone’s Alia Mamdouh says that the central bank will continue its accommodative stance through to 2023, when it could hike rates by 150 bps due to rising inflation and commodity prices.

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