CBE has 'room' for 3rd consecutive interest rates' cut

CAIRO - 14 November 2019: Hitting the lowest rate of urban inflation since July 2006 gives the Monetary Policy Committee of the Central Bank of Egypt the chance to continue the easing cycle, registering the third consecutive cut, according to analysts and experts.

MPC cut the overnight deposit rate, the overnight lending rate, and the rate of the main operation by 100 basis points and 150 basis points in September and August, respectively.

The overnight deposit rate, the overnight lending rate, and the rate of the main operation are cut to be at 13.25 percent, 14.25 percent, and 13.75 percent, higher than economists’ expectations.

The annual urban inflation declined from 4.8 percent in September to 3.1 percent in October, with monthly urban inflation recording 1 percent, up from a flat reading in theprevious month.

The Central Agency for Public Mobilization and Statistics (CAPMAS) also announced that Egypt’s annual consumer price inflation declined to 3.1 percent in October 2019, compared to 4.8 percent in September 2019, with a monthly inflation up-tick from 0.3 percent to1 percent.

The CBE said that Egypt’s annual core inflation rate rose to 2.7 percent in October 2019, from 2.6 percent in September 2019.

"The CBE can comfortably cut rates in the coming meeting," Senior Economist at Shuaa Securities Esraa Ahmed said.Shestated the CBE stillhas a well-accommodating room for more easing before the end of2019 despitean adverse base effect expected in December.

"We continue to expect the CBE to cut rates by100bps inNovember’s meeting, making the best out of the conducivedomestic and global factors," Ahmed noted.

Economist and Head of the Capital Center for Economic Studies and Research Khalid al-Shafei stressed earlier that the decline in inflation to these levels may push towards an interest rate cut of about 1 percent at the next meeting of the Central Bank on November 14, 2019.

Shafei explained that this would have a positive impact on the debt of the government borrowed weekly to fill the budget deficit, pointing out that the interest rate cut also affects the decisions of investors to enter the Egyptian market, as well as the decisions of local investors to conduct investment expansions.

He said that after the liberalization of the exchange rate, interest rates in Egypt were raised to unprecedented figures to rein inflation, and the decline in monthly and annual inflation.

This decline in rates strongly supports the trend of rate cuts, and a wave of monetary easing from the central bank, which positively reflects on investment and the economy as a whole, according to Shafei.

"The decline of inflation has important impacts on the economy,” he noted, clarifying that any decline in inflation directly reflects on the decisions of expansionary companies, as well as on decisions of foreign investors, who monitor several indicators when making an investment decision, especially growth, inflation and interest rates, as well as the consumption and market size.

The investment Bank, Beltone Financial, stressed that easing inflationary pressures along with the strong macroeconomic situation will allow the monetary easing cycle to continue in the current period. Beltone expected inflation to average 4.2 percent in the fourth quarter of 2019, so it raised its forecast for the next rate cut at the MPC meeting on November 14, 2019 to range from 50-100 basis points.

Beltone also predicted that interest rates will be cut by 300 basis points in 2020, justified by several factors: Foreign flows in fixed income instruments after the impact of interest rate cuts on revenues, the performance of net foreign assets at banks and the Central Bank of Egypt, and the exchange rate of the Egyptian pound against the dollar that ranges between LE 1 6-17.

Moreover, Prime Investment Bank expected MPC to cut the overnight deposit rate by 100 basis points at the November meeting. Prime attributed the reasons for its expectation to the weak inflation rates that would still fully support further interest rate cuts at the next meeting.

Head of research at Cairo-based investment bank EFG Hermes Mohamed Abu Basha told Bloomberg that Egypt’s central bank has embarked on rate cuts that could be second only to Turkey among emerging markets this year and next, according to BNP Paribas SA. “After reducing official borrowing costs by 250 basis points in the past two months, it is likely to deliver 100 basis points of easing at its next meeting in November.”

“Still, inflation may pick up after a few months and end the year between 8 percent and 9 percent,” according to Abu Basha.

“The real interest rate will be inflated in the next three months due to the base effect,” he said. “However, investors should pay attention to the December inflation figure to assess the sustainable real rate.”