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Sunday, 31 January 2021

Keep it steady

ENTERPRISE POLL- CBE expected to leave interest rates on hold in its first meeting of 2021: Eleven out of 12 economists and analysts surveyed by Enterprise expect the Central Bank of Egypt (CBE)’s Monetary Policy Committee (MPC) to leave rates unchanged when it meets this Thursday, 4 February. Still, most expect the CBE to resume its easing cycle in the coming months with a potential small cut.

Where rates stand currently: The CBE’s overnight deposit rate is now at 8.25% and the lending rate is 9.25%, while the main operation and discount rates are now at 8.75%. Rates have been left on hold since last November, when the MPC made a surprise 50 bps cut, following an earlier 50 bps cut in September. With the record 300 bps emergency cut the MPC enacted in March 2020 to protect the economy from the fallout from covid-19, the central bank cut by a total 400 bps in 2020.

The sole dissenting voice: Pharos head of research Radwa El Swaify, who forecasts a possible 50 bps cut this month. El Swaify, who was one of only two analysts to correctly call November’s 50 bps cut, expects the CBE to try and get ahead of the coming wave of inflation, which Pharos forecasts coming in at 5.5% this month and rising to 6.9% in February. “This will support the fiscal budget and boost trade and economic growth at the beginning of the year,” Swaify tells Enterprise. Inflation is then expected to end the third quarter at 7.5%, and drop down slightly to 7.0% by the end of the year.

No pressing need for more cuts… Real interest rates are within the CBE’s target range of 2-3%, said EFG Hermes’ Head of Macroeconomic Research Mohamed Abu Basha, and the 400 bps cuts enacted in 2020 should prove sufficient for now. Likewise, CI Capital’s Sara Saada thinks the CBE has been conservative with its liquidity injections this month, causing a slight increase in interest rates, and is likely to continue its conservative approach and hold off on making any cuts this next meeting considering the meagre growth in money supply since November.

Especially with inflation where the CBE wants it: With its amended target range of 7% (+/-2) reflecting the CBE’s shift towards propping up investment activity, a steady interest rate is just what the market needs right now, European Bank for Reconstruction and Development lead economist Bassem Kamar tells us. With that in mind, both Kamar and Mubasher International’s Mohamed Magdy expect the MPC to hold off on making further cuts until the second half of the year.

…Despite mounting pressures: “We perceive upward interest rate pressures as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions,” said HC Securities’ Monette Doss. Decreased banking sector liquidity, as well as global economic uncertainty and the continued volatility of sectors such as tourism and exports in Egypt also pose interest rate pressures.

… And the need for affordable borrowing: Sigma Capital’s Abu Bakr Imam believes cuts are necessary to allow the government to borrow at lower costs and carry out planned projects to achieve targeted growth levels, but still expects the CBE will hold off on further monetary easing until later in the year. Suez Canal Bank’s Mohamed Abdel Aal, on the other hand, thinks growth can be achieved with a steady increase in public spending on projects and consumer spending on goods and services, without the need for more cuts at the moment.

But larger cuts could be necessary if inflation and growth fall below forecasts: “The CBE may resume monetary easing at a more aggressive pace if inflation rates fall beneath 6%,” said Mubasher’s Magdy, or “if GDP growth rates dropped significantly below the baseline forecast trajectory.”

A steady rate could also boost FX inflows by offering attractive yields to foreign investors, said Abdel Aal. This could be a priority for the CBE at the moment as Egyptian treasuries face higher competition from Turkey, which boosted its policy rates by 475 bps in November, and by another 200 bps in December, putting its real return rates on level with Egypt’s at 3.8%. Arqaam Capital’s Noaman Khalid also points to the importance of attracting portfolio inflows as impetus for the MPC to hold off on rate cuts.

Are we more likely to see a cut in March? Prime Securities’ Mona Bedeir expects as much, penciling in a 50 bps in March and another 50 bps cut at some later point in the year. Nonetheless, “the CBE will be very cautious, given the external pressures that still weigh on the future exchange rate,” and the possibility of its loose monetary stance turning inflationary, Bedeir predicts.

Looking ahead: El Swaify sees room for another potential 50-75 bps cut in October, totaling cuts of 100-125 bps this year, while Magdy says we can expect a 50 bps cut at some point before the end of the fiscal year. Bedeir says markets are pricing in a total of 100 bps of cuts throughout 2021, which Khalid thinks will be concentrated in 2Q2021 or the back half of the year.

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