Capital Economics expects unchanged interest rates despite falling inflation

CAIRO – 10 July 2019: Capital Economics expected the Central Bank of Egypt (CBE) to keep interest rates unchanged during July’s meeting despite the decline of inflation rates during June.

Capital Economics stated in a research that policymakers will wait for a clarification about the impact of recent subsidy cuts, although the inflation declined to a three-year low of 9.4 percent on a year-on-year basis.

“A rate cut is more likely at August’s meeting,” the research noted.

It also attributed the drop of inflation to weaker food inflation and declines in transport and housing inflation.

The Central Agency for Public Mobilization and Statistics (CAPMAS) announced that Egypt’s annual consumer price inflation rose to 8.9 percent in June 2019, compared to 13.8 percent in June 2018.

“Falling inflation, coupled with the dovish shift among central banks around the globe, increases the chances of an interest rate cut. But we think that the CBE will want to assess the impact of electricity and fuel price hikes that took effect this month,” it noted, expecting the overnight deposit rate to be unchanged at 15.75 percent.

It also anticipated the easing cycle to resume if inflation continues to inch down during the rest of the year, penciling a 500-base-point cut by the end of the next year, taking the overnight deposit rate to 10.75 percent.

During May’s meeting, the overnight deposit rate and the overnight lending rate were kept at 15.75 percent and 16.75 percent, respectively.