Pharos expects unchanged interest rate in August

CAIRO – 14 August 2018: Pharos Research expected the Central Bank of Egypt (CBE) to keep interest rates at their current levels during their upcoming meeting in August.

Pharos attributed this expectation to the acceleration of inflation during August and September due to seasonal factors and fiscal reform measures, as well as the recent low rate of foreign ownership of treasury bills.

The CBE cut interest rates twice earlier this year, in February and March by 200 basis points, and kept the rates unchanged during May and June meetings at 16.75 percent and 17.75 percent for the overnight deposit rate and the overnight lending rate respectively.

The report anticipated that monetary policy easing will be more cautious to avoid outflows of portfolio investment as a result of the rise of the dollar against emerging-market currencies, causing further global sell-offs in emerging markets, despite the Federal Reserve’s decision to stabilize interest rates at the last meeting.

It also added that the levels of interest rates at other emerging markets such as Argentina and Turkey put more pressure on the CBE.

Regarding inflation, Pharos said that the high inflation rate during the last two months was an expected rise due to the financial reform measures taken by the Egyptian government at the beginning of the fiscal year 2018-2019.

The Cabinet announced on June 16 lowering the fuel subsidy to 25 percent, after cutting electricity subsidies on June 12, raising prices by an average of 26 percent in the fiscal year 2018/2019 that began in July.

“The rapid pace of inflation may ease after September, when the impact of economic reform measures is fully absorbed, and this reform is fully reflected in the prices of goods and services, as well as the end of the ‘return to school season’,” the report noted.

The Central Agency for Public Mobilization and Statistics (CAPMAS) announced on Thursday that Egypt’s annual consumer price inflation slipped to 13 percent in July 2018, compared to 34.2 percent in the same month of 2017.

On a monthly basis, inflation increased 2.5 percent in July, compared to the previous month, recording 289.9 points, CAPMAS stated.

Moreover, the CBE said that Egypt’s annual core inflation rate declined to 8.54 percent in July 2018 from 10.9 percent in June 2018, according to a report.

On a monthly basis, core inflation recorded 0.6 percent in July 2018, compared to 1.6 percent in June.

Core inflation discounts or strips out certain categories considered more volatile.