Contradicting views on CBE's interest rates next move

CAIRO - 26 December 2017: Local investment bank HC Securities is expecting the Central Bank of Egypt (CBE) to keep interest rates unchanged in its Monetary Policy Committee (MPC) meeting Thursday.

"The MPC kept interest rates on hold in its previous meeting despite the stability in inflation rates, which indicates that the CBE will take a similar conservative approach on December 26," chief economist at HC Securities Sara Saada said in a Tuesday research note.

Stable exchange rate, improving balance of payments, inflows of foreign direct investment that covered account deficit and initial production from Zohr gas field are reflecting improvement in the macroeconomic indicators.

"But, with the relatively contained drawbacks of the high interest rate environment, as growth continues to accelerate and treasury yields (cost of borrowing) drop on the back of an easing cycle expectations, we believe the CBE can maintain its conservative stance," Saada explained.

In the previous MPC meeting on November 16, the The CBE decided to keep interest rates on hold, putting the overnight deposit rate at 18.75 percent and the overnight lending rate at 19.75 percent.

Other analysts are expecting an easing CBE approach. Lower inflation rates registered in November will likely encourage the CBE to make the long-awaited decision to lower interest rates, most probably by 1 percent, economist at Mubasher International Esraa Ahmed said in a December research note.

As expected, Egypt’s annual urban consumer price inflation fell to 26.7 percent in November from 30.8 percent in October, the official statistics agency CAPMAS announced earlier this month.

"The base effect should be clearer in the upcoming months as the inflation rate for December is anticipated to be around 20 percent," Ahmed added.

Mubasher's expectation is in line with statements from Finance Minister Amr el-Garhy, who said on Sunday that Egypt’s inflation rate is expected to drop down to 20 percent in January and to 13-14 percent by August 2018.

Also, London-based research company Capital Economics said in a report in November that the first interest rate cut is expected in December. Capital Economics' Middle East economist Jason Tuvey believes the first rate cut will come at 100 basis points to hit 17.75 percent.

Pharos Holding's economic analyst Ramy Oraby shared similar views. He says that the CBE is more likely now to consider cutting interest rates in the upcoming meetings.
“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.