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Sunday, 13 June 2021

ENTERPRISE POLL- CBE to leave rates on hold at upcoming meeting

ENTERPRISE POLL- The CBE expected to leave rates on hold: The Central Bank of Egypt (CBE) will likely leave interest rates on hold when its Monetary Policy Committee meets on Thursday, according to an Enterprise poll. All 11 analysts and economists we surveyed expect the central bank to stick to its cautious approach and hold off on making cuts for most of 2021 amid signs that rising commodity prices abroad are beginning to translate into inflationary pressures at home.

Where rates currently stand: The overnight deposit rate is at 8.25% and the lending rate 9.25%, while the main operation and discount rates are at 8.75%. The central bank slashed rates by 400 bps last year, including an emergency 300-bps cut in March to protect the economy from the fallout from covid-19, as well as two 50-bps cuts in September and November. It has since maintained rates for four consecutive meetings including its most recent in April.

Inflation set to rise: “We expect the CBE to maintain rates at least until October 2021 […] since inflation will start edging up gradually […] until September,” Pharos Holding’s Radwa El Swaify said. Higher inflation for the remainder of 2021 will be driven primarily by an unfavorable base effect, rallying global commodity and raw material prices, and a spike in the prices of fresh fruits and vegetables during the summer, she added.

Annual urban inflation accelerated to 4.8% in May, due to a spike in food prices and rising global commodities prices. While the figure is still short of the central bank’s 7% (± 2%) target range, analysts see the upward trend continuing as we head further into the year, with EFG Hermes’ Mohamed Abu Basha penciling in a headline rate of 5.5-6% come December and HC Securities’ Monette Doss an average 6.8% throughout the rest of 2021.

We’re not the only ones bracing for heightened inflation: “The agitated global inflation outlook drove some EMs to tighten their monetary policy already, and officials have signaled that more rate hikes should be expected down the road,” says Prime Holding’s Mona Bedeir. While inflation rates are still relatively low, fears of a global spike still persist, Abou Basha says.

Egyptian rate watchers are largely on the same page: “Given the rising food prices on a monthly basis after the drop over the past two months that coincides with the significant rise in international commodities prices as well as the rise in oil prices, we expect maintained interest rates in the upcoming meeting,” Beltone’s director of macro and strategy Alia Mamdouh said. CI Capital senior economist Sara Saada, independent analyst Hany Aboul Fotouh, Suez Canal Bank’s Mohamed Abdel Aal, and Mubasher’s Hesham El Shebeini were all of the same mind.

The carry trade is more important than ever as global rates creep up: “The need to maintain the lucrative carry trade … particularly with the rise in global rates that is posing a risk to inflows into emerging markets, backs our view [that policy rates will remain unchanged,” Mamdouh said. Foreign investment in EGP bonds recovered from last year’s covid-induced sell-off, eclipsing their pre-covid peak in February to hit USD 28.5 bn in February.

This was seen earlier this year when foreign holdings dropped off in March, likely due to rising US yields and monetary tightening in other emerging markets.

When can we expect a rate cut? Perhaps toward the end of the year. Since inflation will remain within the CBE’s target range and is seen picking up to an average 6.7% in 2H2021, this should allow the central bank to keep the real policy rate positive, giving it scope for a small rate cut by the end of the year provided global conditions improve, Bedeir said. El Swaify also expects a cut to be possible only in 4Q2021. The MPC will also likely want to monitor the effect of planned public sector wage and pension hikes that come into effect in July on inflation, Sigma Capital’s Abu Bakr Imam told us.

And next year could see the easing cycle continue: Inflation is likely to fall below the CBE’s target range by the end of the year, and to remain subdued going forward, prompting further easing to an overnight deposit rate of 6.75% by the end of 2022, Capital Economics’ James Swanson wrote in a research note.

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