The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is anticipated to convene Thursday for the last time in 2020, to review key interest rates.
During the last meeting, held 12 November, the CBE decided to cut the overnight deposit rate, overnight lending rate, and the rate of the main operation by 0.5 per cent (50 bps), to reach 8.25 per cent, 9.25 per cent, and 8.75 per cent respectively.
The discount rate was also cut by 0.5 per cent to 8.75 per cent.
The cuts brought the total cuts introduced in 2020 to four percent in response to the Covid-19 pandemic and its associated challenges on the global economy, and on the Egyptian economy in particular.
In March, the CBE decided to cut key interest rates by three percent (300 basis points) as a preemptive measure to contain the effects of the Covid-19 crisis on Egypt's economy and to maintain the gains of the government's economic reform programme, according to the CBE.
Over four meetings since March, the CBE has not introduced more interest rate cuts thanks to a declining headline inflation rate, which was under the limit the CBE set at nine percent (+/-3 percent) until the 12 November meeting.
Egypt’s recent monthly inflation rate increased by 1.1 percent in November to reach 2.9 percent, up from 1.8 percent in October, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced in December.
The annual headline inflation rate rose as well, to 6.3 percent in November, up from 2.7 percent in November 2019, according to CAPMAS.
CAPMAS attributed the increase in inflation rates to the rise in the price of foodstuffs and beverages in November by 3.2 percent, a four percent increase Y-o-Y.
Head of macro and financials at HC Securities and Investment, Monette Doss, expected the CBE to maintain current interest rates, despite the expected increase in inflation rates in December.
“We believe December inflation figures could accelerate further to 6.1 percent Y-o-Y, and 0.2 percent M-o-M, possibly correcting for November price increases resulting from supply shocks of some vegetables. However, inflation would still remain within the CBE’s target of nine per cent (+/- 3 percent) for the fourth quarter of 2020," Doss said.
Doss noted that declining unemployment levels to 7.3 percent in the third quarter of 2020 from 9.6 percent in the second quarter of the year mirrored positively on consumer spending, adding that the relative improvement in investor confidence along with monetary easing started to bear fruit as indicated by Egypt’s Purchasing Manager Index (PMI) exceeding the 50 benchmark in September, October and November, coming in at 50.4, 51.4 and 50.9 respectively.
Mashora Group’s consultant Charlene Rahall, on the other hand, expects the CBE to introduce cuts of 0.5 percent (50 bps) in Thursday's meeting.
Rahall attributed her expectation to recent inflation rates that remain low and high real rates, which are higher than in most emerging markets, and that leave a room for further monetary easing.
Rahall told Ahram Online that monetary policy easing and lower inflation will support business confidence and local consumption, boosting private sector activity and encouraging much-needed foreign direct investment (FDI).
“The Egyptian economy, which seems to exceed expectations during the current crisis, needs a strong rebound in tourism and FDI inflows to return to pre-Covid growth levels,” said Rahall.
In December, Fitch Solutions slightly downgraded its economic growth outlook for Egypt to 3.2 percent in 2021, down from 3.3 percent projected in November, expecting the country to achieve four percent economic growth over the next three years.
In its monthly outlook insights on the Middle East and North Africa (MENA) region, shared with Ahram Online, Fitch Solutions expects Egypt’s interest rate to stand at 9.75 percent until end of 2021, projecting that inflation will hit six percent in 2021, slightly above Fitch's projection in November of 5.9 percent.