Capital Economics anticipates Egypt to continue monetary easing cycle

CAIRO - 18 November 2019: Capital Economics expected a further monetary easing in Egypt during the coming months after the 100 basis points cut in November's meeting.

"While we expect inflation to edge up in the near term, it will remain below the central bank’s target. As such, we continue to anticipate another 225bp of cuts by end-2020," Capital Economics said in a report Egypt Today got a copy of.

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 to 1 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 report also thought that the easing cycle has further to run, expecting the overnight deposit rate to be lowered to 10 percent by the end of next year and to 9.50 percent by end-2021.

"In light of the sharp rate cuts and plunge in inflation in recent months, the consensus has swung closer to our view. But we still think that the easing cycle will be a little deeper than most currently anticipate," it stated.

Commenting on November's decision, the report stated that the further drop in inflation in October meant that it was never really in question that the MPC would cut rates during its meeting. "Policymakers also probably felt comfortable lowering interest rates given that the external backdrop has improved in recent weeks. As we’ve noted before, previous rate cuts in this cycle also came at a time when other EM central banks had been in easing mode."

"The MPC may have also wanted to push back against upward pressure on the pound," it stated, clarifying that the currency has been one of the best performers in the emerging world this year, rising by more than 10 percent against the dollar, which reflected in a steady appreciation of Egypt’s real effective exchange rate (i.e. the trade-weighted exchange rate adjusted for inflation differentials), which is now close to its average over the past decade.

The report noted that the erosion of external competitiveness may start to act as a headwind to economic growth.

Capital Economics anticipated inflation to rise during the coming period with the existence of good reasons for price pressures will remain weak.

"While we expect the pound to depreciate again soon, it is likely to be gradual. The previous inflationary effects of fiscal policy, including subsidies and large public sector wage increases, are unlikely to return. And the improvement in monetary policy-making will help to anchor inflation expectations and thus actual inflation," it added.

The Monetary Policy Committee of the Central Bank of Egypt (CBE) cut the overnight deposit rate, the overnight lending rate, and the rate of the main operation for the third consecutive meeting in row by 1 percent or 100 basis points during the meeting held on Nov. 14, matching experts' anticipations.

The overnight deposit rate, the overnight lending rate, and the rate of the main operation are cut to be at 12.25 percent, 13.25 percent, and 12.75 percent, respectively.

Moreover, credit and discount rates were declined to 12.75 percent from 13.75 percent.

The Ministry of Finance aims to reduce the government debt to GDP ratio to 82.5 percent by the end of June 2020 and to 77.5 percent by the end of June 2022.