CBE keeps interest rates unchanged during 2020’s 1st meeting

CAIRO – 16 January 2020: The Monetary Policy Committee of the Central Bank of Egypt (CBE) kept the overnight deposit rate, the overnight lending rate, and the rate of the main operation unchanged during 2020’s first meeting, within a decision referred to by experts as a “tough call”.

This meeting was postponed from being held on 26 December 2019, awaiting the completion of the boards of the CBE and MPC under the presidency of CBE governor Tarek Amer.

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

Moreover, credit and discount rates are at 12.75 percent from 13.75 percent.

This decision comes after MPC cut the interest rates four times in 2019.

As for January’s meeting, opinions of Experts and analysts on CBE’s decision diversified between keeping rates unchanged and cutting them by 50bps or 100bps.

Senior Economist at Shuaa Securities Esraa Ahmed went for pausing the pause of easing cycle, attributing her opinion to several factors, saying that more “decent” inflation readings are to come, Egypt Treasuries still globally competitive, but we do not want to lose ground quickly, global commodity prices, and there is no hurry to continue the cycle.

Ahmed clarified that the inflation rate between 6 to 8 percent is the normal range for Egypt’s annual inflation readings, “we believe January and February readings might be lower than the 7 perecent witnessed in December, save for any unpleasant movements by fruits and vegetables due to any climate shocks.”

“Besides, annual core inflation witnessed an uptick from 2.11 percent in November to 2.37% in December. While this may not look like a big increase, we think the CBE might prefer taking some time to study demand pressures and inflationary patterns in the coming period,” she noted.

Egypt’s statistic body, CAPMAS, announced that the annual inflation rate accelerated to 7.1 percent in December, compared to 3.6 percent the previous month. On a month-on-month basis, prices fell 0.2 percent after a 0.3 percent drop in November.

The CBE said that Egypt’s annual core inflation rate rose to 2.4 percent in December 2019, from 2.1 percent in November 2019.

As per Egypt’s treasuries, she stated that Egypt’s real interest rate currently stands at 5.15 percent. Despite still being competitive, it compares low to the 8.65 percent recorded in November for example.

“When comparing to peers, Egypt still offers a competitive real rate. However, the current inflation/interest rate mix dragged Egypt to rank fifth in terms of high real interest rate behind Ukraine, Ghana, and others, having been the first or the runnerup for some time,” Senior Economist referred.

Regarding global commodity prices, she said that during the mid-December/early January period, Brent crude prices increased from early USD60s/bbl to around USD65/bbl, backed by the phase-one trade deal between the US and China. This was followed by a short-lived breaching of the USD70/bbl level due to geopolitical risks sparked early January in the Middle East before cooling back to the mid-USD60s/bbl.

“Oil prices continue to fluctuate in reaction to day-to-day news. But according to 2020 oil outlook and the highly probable re-emergence of trade tensions, we believe oil prices might decline later this year, giving more space for cutting rates more comfortably by then," according to Ahmed.

Meanwhile, she said that there is no hurry, we have already come a long way. “In 2019, the CBE made aggressive – yet, thoughtful – easing steps, with cumulative 450bps cuts during the year. This brought Egypt very close to pre-flotation interest rate levels (12.75 percent and 11.75 percent for O/N lending and O/N deposit rate, respectively) and not too far from its normal rates (i.e. real interest rates of 2-3 perfect).

“In our view, the year 2020 will be conducive to further cuts in the range of 200-300bps, which is not a very hard task to undertake. This means the CBE has more time to spend assessing possible inflationary pressures, the impact of the cumulative cuts so far, and the different sectors’ response to its initiatives launched recently, while enjoying competitive yields as long as possible,” she expected.

According to a poll conducted by Enterprise, Four of seven analysts expected the central bank would cut rates, while three see the MPC leaving rates on hold. While Seven of 10 economists polled in December, when the meeting was originally scheduled to take place, saw rates being left unchanged.

While Reuters poll revealed that Egypt’s central bank is likely to cut interest rates for a fourth consecutive time on Thursday despite inflation rising in December. Eight out of 11 economists surveyed by Reuters expected the Central Bank of Egypt (CBE) to cut rates. Four saw a 50 basis point cut and four predicted a 100 bps cut.