CBE to keep interest rates on hold ignoring declining inflation

CAIRO - 11 July 2019: Despite the sharp decline of inflation rate in June, recording the lowest levels in 3years, analysts and experts anticipate that interest rates will be held unchanged during July's meeting in a step to test the impact of recent subsidy cuts.

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.

Egypt’s annual core inflation rate, which discounts or strips out certain categories that are considered more volatile, declined to 6.4 percent in June 2019, from 7.8 percent in May 2019, according to CBE.

Capital Economics also expected the Central Bank of Egypt (CBE) to keep interest rates unchanged during July’s meeting, despite the decline of inflation rates during June, pointing out 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,” it noted in a research.

Also, HC Securities & Investment expected the CBE to keep interest rates unchanged at its next July 11, 2019 Monetary Policy Committee (MPC) meeting.

Head of macro and financials at HC Research Sara Saada noted that yearly inflation figures will be largely influenced by favorable base effect in the coming few months (from June–October 2019).

“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,” Capital Economics noted, expecting the overnight deposit rate to be unchanged at 15.75 percent.

Capital Economics 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.

Shuaa’s senior economist Israa Ahmed said: "Despite the much lower than expected inflation figure for June, we keep our view on unchanged interest rates in July's meeting."

She believed that CBE will prefer to wait, until the inflationary wave of fuel products re-pricing fades away, adding that although such a wave is not expected to be high, CBE would be cautious about second-round effects.

"That is, we believe the CBE might wait for a better timing, especially if the global scene becomes more helpful," she noted.

In a survey conducted by Reuters, 14 out of 15 economists said the bank’s Monetary Policy Committee was unlikely to change its overnight rates, with deposits at 15.75 percent and lending at 16.75 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.