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Sunday, 27 December 2020

You called it: CBE leaves rates on hold

The Central Bank of Egypt’s Monetary Policy Committee left rates on hold in its policy meeting on Thursday, citing higher inflation and muted economic growth in the third quarter of the year, the CBE said in a statement (pdf). The decision comes amid growing global concern about a new, faster spreading covid-19 variant. This prompted the central bank to pause its easing cycle after having already enacted two consecutive rate cuts.

Where do rates stand? The CBE’s overnight deposit rate is at 8.25% and the lending rate 9.25%. The main operation and disc. rates are 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.

The CBE also adjusted its inflation target to a range of 7% (+/- 2%) by 4Q2022, from a previous target range of 9% (+/- 3%), it said. Inflation has been muted for the better part of 2020, exceeding the lower 6% band of the CBE’s target range only once in January. The annual headline figure, however, accelerated to 5.7% in November from 4.6% in October. Inflation could increase in 2021 due to “unfavorable base effects related to the normalization of monthly inflation rates,” but is unlikely to stray away from the 7% (+/- 2%) by 4Q2022, Bloomberg quoted Pharos’ head of research Radwa El Swaify as saying.

In line with expectations: All 10 economists and analysts we surveyed last week predicted the CBE would leave rates unchanged in its final meeting of the year. Most argued this would be due to rising inflation, the ongoing pandemic, and to support the all-important carry trade. Egypt’s carry trade is attractive to overseas investors as, despite the recent rate cuts, the country’s real interest rate is still second highest in the world, surpassed only by Malaysia, according to a list of more than 50 major economies tracked by Bloomberg.

While economic growth was slow in 3Q2020, it was better than the previous quarter: Real GDP growth recorded 0.7% between July and October, up from a contraction of 1.7% in the previous quarter, when lockdown measures were in full force, the CBE said. “Most demand side leading indicators for October and November 2020 show continued signs of recovery after displaying weakness during [2Q2020],” the CBE added. Planning and Economic Development Minister Hala El Said had announced the muted growth figure in last week’s cabinet meeting, citing the pandemic-induced hit to the tourism industry as the main culprit.

When can we expect the CBE to resume its easing cycle? There’s still room for authorities to cut rates, “but the timing and magnitude of the cuts are completely reliant on volatility in global markets,” El Swaify said. The first rate cut may come in early 2021, analysts we surveyed for our poll said. HC Securities penciled in a100-bps cut in 1Q2021, while Renaissance Capital predicted a total of 100-150 bps over the next 12 months.

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