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Sunday, 12 December 2021

ENTERPRISE POLL- CBE to keep rates steady

ENTERPRISE POLL- The Central Bank of Egypt (CBE) will likely leave interest rates on hold when it meets this Thursday as the bank looks to protect the economic recovery and maintain attractive real rates for the carry trade — while continuing to keep an eye on inflation. All 11 economists and analysts we surveyed in our regular interest rate poll expect the CBE’s Monetary Policy Committee to maintain rates as lower-than-expected November inflation figures give it breathing room to hold off any changes. Meanwhile, the current economic outlook is somewhat uncertain amid the spread of the new Omicron variant, whose severity and risk level remain unclear.

Where rates stand now: The overnight deposit rate is at 8.25%, the lending rate at 9.25% and 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. It has since maintained rates for eight consecutive meetings, including its most recent in October, amid concerns about an increase in inflation.

Inflationary pressures have cooled off here at home: Annual urban inflation slowed for the second month running in November as pressure on food prices continued to ease, with the headline rate falling to 5.6% last month from 6.3% in October, the lowest rate since July and within the lower end of the central bank’s target range of 5-9% for 4Q2022.

The unexpected curb on price rises “gives a breather from the inflation tensions caused by global chaos,” according to Al Ahly Pharos’ Israa Ahmed, who joined most analysts in expecting inflation to remain within the CBE’s target of 7% (+/-2%) in the coming months. The headline urban rate “might hover around 6% YoY in December,” according to Ahmed, while HC Securities’ Monette Doss said the firm expects inflation to average 5.8% in the fourth quarter of 2021.

Keeping rates steady also takes consumer-led economic recovery into consideration: Egypt’s still-high real interest rate could have given the CBE room to enact a cut, but protecting consumer appetite is also likely to play into the MPC’s decision to keep rates on hold, said Suez Canal Bank’s Mohamed Abdel Aal. Maintaining rates would also help maintain remittance inflows and protect portfolio investments, Abdel Aal said.

But it’s not time to drop the ball: Global inflationary pressures will continue to drive CBE policy decisions going into the new year, despite the slight cooling-off in domestic prices in recent months, according to analysts. The CBE will likely continue to keep a close eye on price rises amid a murky picture globally, which Arqaam Capital’s Noaman Khalid suggests is giving the CBE “more reason than ever” to keep rates on hold.

“The CBE’s task of keeping inflation expectations within its target will face increasing challenges in 2022. Thus, we do not expect any shift in its monetary stance until it gets a clearer picture of the outlook of global inflation drivers and its spill-over effect on the country,” said Prime Holding’s Mona Bedeir. Mubasher’s Mohamed Magdy, meanwhile, expects inflation to rise to hit 7% in 2H2021-2022, averaging 6.7% over FY2021-2022. Capital Economics also expects the headline inflation rate will “remain elevated over the rest of this year and into 2022.”

Hiking rates could affect the recovery amid Omicron: While current high rates help protect foreign inflows, any further hike would add a significant burden on the economy by raising the cost of the debt-servicing burden as well as private-sector borrowing, potentially denting growth, Magdy said.

Although GDP projections for the coming year are strong, they are also “subject to risks arising from the uncertainties surrounding the severity of the new coronavirus variant Omicron,” according to Magdy, who noted that relatively low vaccination rates put the recovery at greater risk of being thrown off course by Omicron. This uncertainty gives further impetus for the CBE to adopt a wait-and-see approach, said EFG Hermes’ Mohamed Abu Basha.

While global economic forces make a rate cut out of the question: Protecting real rates — which count among the highest in the world and ensure that our carry trade remains attractive to foreign investors — remains key, especially considering the morse hawkish turn from the US Federal Reserve in recent weeks. On the flipside, Arqaam’s Khalid suggests that even a more hawkish Fed isn’t reason enough to move interest rates here at home, saying that the CBE can counteract the effects of slightly higher US rates through open market operations.

With all this in mind, interest rates could stay where they are for the foreseeable future: The CBE is unlikely to make any changes to interest rates as long as inflation remains below the midpoint of its target range, CI Capital’s Sara Saada said. Capital Economics also doesn’t expect any monetary easing before “later next year,” while Al Ahly Pharos’ Ahmed sees the CBE maintaining rates “for as long as possible.”

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