Will CBE cut interest rates during Thursday’s meeting?

CAIRO – 28 March 2019: Ahead of the coming inflationary season in Egypt and positive indicators of currency, economy and foreign inflows, experts’ expectations about the Central Bank of Egypt’s (CBE) decision related to the interest rates in its meeting Thursday, March 2019, varied.

Some experts who expected the CBE to cut rates during the meeting attributed their views to the strengthening of the Egyptian Pound, foreign inflows into treasuries and the positive outlook of the Egyptian economy.

Beltone investment Bank forecasted that the rates would be cut by 50-100 basis points during Thursday’s meeting.

Investment Bank affirmed that the inflation hike doesn’t affect the outlook of the inflation rates, expecting it to reduce the inflationary pressures during the first half of 2019.

Macroeconomist, Fiscal Policy and PFM expert MohebMalak said that it is indeed a tough call, referring that the targeted inflation is 9 percent (+/- 3 percent) during the fourth quarter 2020. “It is difficult to assess whether the current inflation level is consistent with achieving that target or not.”

Malak added that the inflation outlook is further clouded by the potential supply shocks to inflation arising from the expected fiscal measures early in the coming fiscal year including petroleum products and electricity price hikes.

“It is probably true that the CBE would rather maintain a gradually declining path to interest rates rather than cutting too hastily and then having to reverse the path of interest rates to hit the target. That means that the CBE would rather err on the hawkish side,” according to Malak.

“Still, in my opinion, due to the transitory nature of the recent shocks to inflation and the continued weakness of domestic demand, it is more likely than not that the MPC would cut rates by another 100 bps in the coming meeting on Thursday,” he added.

Malak pointed out that this MPC is the last opportunity for the Central Bank to cut rates in the coming six months before the seasonal rise in inflation ahead of Ramadan (May) as well as the impact of fiscal measures expected around the beginning of the new fiscal year (June – July). “In other words, if the Central Bank missed this window, it will have to wait until at least September to ease rates, which it may not afford given the weakness in domestic demand.”

Earlier this month, Fitch Ratings upgraded Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) to B+ from B, with a stable outlook.

“The consolidation will mostly come from lower interest payments because of the disinflation trend, lower interest rates and lower debt as well as another round of subsidy reforms, including the introduction of an automatic fuel tariff adjustment mechanism. Further moderation of the wage bill/GDP and continued efforts to improve the tax administration will also contribute,” the report clarified.

Bloomberg said that the Federal Reserve has handed Egypt another reason to proceed with what could be the world’s deepest series of interest-rate cuts.

It added that the U.S. central bank’s surprise forecast for no rate increases in 2019, combined with a rally in Egypt’s currency, means policy makers may deliver a reduction in borrowing costs for the second straight month on Thursday. Renaissance Capital’s global chief economist Charles Robertson expects another cut of 100 basis points “due to a dovish fed and to counter rapid pound appreciation.”

According to Bloomberg, Renaissance Capital’s global chief economist Charles Robertson expects another cut of 100 basis points “due to a dovish Fed and to counter rapid pound appreciation.”

“Domestic demand is fragile, non-food inflation is low and globally central banks are shifting to an easing bias,” he said.

Most economists surveyed by Bloomberg predict the central bank will cut by a percentage point. Five analysts see the benchmark staying at 15.75 percent.

Mideast economist at Bloomberg Ziad Daoud said: “It is a close call, but we expect the Central Bank of Egypt to keep rates on hold instead of cutting them further. The surge in inflation last month should tip the balance toward holding.”

“Rates will be down in support of the debt control strategy given that foreign investors continue to be super interested in Egypt’s treasury investments, in light of a stronger exchange rate and an attractive carry trade,” said Radwael-Swaify, head of research at Cairo-based Pharos Holding.

“Relatively stable core inflation and stronger capital inflows, combined with our view that the Central Bank of Egypt may want to loosen policy before upcoming subsidy cuts means that an interest-rate cut seems more likely than not,” senior economist at Capital Economics Jason Tuvey said.

Meanwhile, senior economist at Shuaa Securities Esraa Ahmed believed that CBE could prefer to keep rates unchanged for some time.

Ahmed attributed this beliefto the recent inflation hikes which were mainly pushed by food items, and the need to keep foreign inflows in shape, especially before imports pick up in the upcoming season, in addition to global oil prices.

She clarified that although oil prices fluctuate on a daily basis, their general trend exhibits a gradual and steady increase. Also, Asian countries rejecting shale oil cargoes could boost prices. “This is particularly important ahead of setting the fuel re-pricing mechanism in motion and cutting subsidies.”

“CBE may pick another time to cut rates, it at all, during the year. This may come after the inflationary wave starts to cool and the base effect turns more favorable,” she noted.

During the first meeting in 2019, the Monetary Policy Committee of the Central Bank of Egypt (CBE) cut the overnight deposit rate and the overnight lending rate to 15.75 percent and 16.75 percent, respectively.

CBE to continue easing cycle in 2019

Fitch Solutions expected that the CBE will decrease the interest rates in the second half as price pressures cool down, saying the pace of easing will likely be gradual amid more challenging external conditions and persistent risks of capital flight.

"We forecast the CBE’s overnight deposit and lending rates to end 2019 at 14.75 percent and 15.75 percent,respectively, implying a cumulative 200 basis points (bps) worth of cuts this year," Fitch Solutions said in a statement.

Moreover, EFG Hermes anticipated CBE to lower interest rates by 1 to 2 percent in 2019, with an average inflation rate to stabilize at 14 percent, which will boost the national economy and push forward investment rates.

The bank might mull a 1 or 2 percent cut of interest rates in the second half of 2019, EFG Hermes clarified, noting that foreigners' exit from treasury bills will not place any pressure on the central bank because their money was not used in financing the trade balance deficit.

Hermes pointed out that foreigners' investments in treasury bills surmounted $23 billion in the first quarter of 2018, but they had no big effect on the Egyptian economy. This means that when $11 billion of foreigners' investments in treasury bills exited at the end of the year, they also had no effect.

Hermes said Egypt's foreign cash reserves hit $45 billion in 2018, expecting the central bank to abandon its policy of increasing reserves in order to push forward investments.

Egypt which targets to hit average interest rates on the government’s debt instrument of 14.7 percent in the current budget, compared to an expected average of 18.5 percent in FY2017/18 budget, kept the overnight deposit rate and the overnight lending rate at 16.75 percent and 17.75 percent, respectively, during December’s meeting for the sixth time in 2018.