CBE to consider cutting interest rates as inflation drops: Analysts

CAIRO – 9 November 2017: Inflation rates will keep declining, increasing the possibility of cutting interest rates in the upcoming Monetary Policy Committee (MPC) meetings of the Central Bank of Egypt (CBE), economic analysts weigh in.

Egypt’s annual inflation dropped in October to 31.8 percent year-on-year, compared to 32.9 percent year-on-year in September, the official statistics agency announced Thursday.

The change in inflation could be even less if the education sector is excluded, economist at Pharos Holding Ramy Oraby told Egypt Today; explaining that October of every year witnesses the same level of hikes as families purchase their school needs.

In the breakdown published by CAPMAS, the education sector has seen 19.8 percent increase, contributing 0.78 percent in the monthly change.

London-based research firm Capital Economics agreed on the matter; highlighting that the inflation was affected by higher communications and education rates. “The latter reflects schools raising their tuition fees ahead of the new academic year at a faster pace than they did in 2016,” Middle East economist Jason Tuvey said in a note.

The consumer price index (CPI) is mainly affected by food and beverage prices, accounting for 40 percent of the CPI basket and rising by 39.6 percent year-on-year, the slowest pace since January.

Meanwhile, Egypt’s core inflation fell to 30.53 percent year-on-year in October, from 33.26 percent in September, according to data published by the CBE.

On the inflation’s impact on interest rates, Oraby said that the CBE is more likely now to consider cutting interest rates; “not necessarily in the next MPC meeting, but in the upcoming meetings,” he pointed out.

“The CBE usually doesn’t look for a certain level of inflation to reduce interest rates, but it looks at the overall economic trend,” Oraby said.

Tuvey thought that the current rate is not enough for the central bank to cut interest rates in its meeting, scheduled November 16. “We expect the first rate cut to come in December,” he said; expecting the overnight deposit rate to be left unchanged at 18.75 percent.

Capital Economics believe the first rate cut will come in MPC’s meeting December 28 at 100 basis points to be at 17.75 percent.

For the first quarter of the current fiscal year, annual inflation averaged at 32.45 percent, Mubasher Trade’s economist Esraa Ahmed said in a research note as well.

“We believe we are leaving the 30s territory soon as November and December inflation rates are expected to benefit from the favorable base effect, estimated at 24.8 percent and 20.8 percent, respectively, averaging an estimated 25.5 percent for the whole second quarter of FY 2017/18,” Ahmed said.