Most analysts agree that the Central Bank of Egypt (CBE) will cut interest rates for the first time in six months when its Monetary Policy Committee (MPC) meets today.
They expect a rate cut of at least one per cent, followed by a similar reduction before the year end. At its last meeting on 11 July, the MPC left key interest rates unchanged at 15.75 per cent and 16.75 per cent for overnight deposit and lending, respectively.
Feeding these expectations are the recent unexpected decline in the local inflation figures and a relatively stable exchange rate. Fears that a global recession is in the making also make the move inevitable.
“The current scene is ‘easing-friendly’,” said Shuaa Securities researcher Esraa Ahmed.
Easing is a term that economists use to describe moves to boost investment by lowering interest rates.
Ahmed said that with the high real interest rate, the difference between the inflation rate and interest rates on deposits, currently standing at seven per cent, along with easing sentiments globally especially after the US Federal Reserve’s recent cut in rates and cooler oil prices, “the moment was exceptionally suitable for a rate cut.”
The inflation rate, a main driver behind central bank moves on monetary policy, declined to its lowest rate in 47 months in July, dropping to 8.7 per cent from 9.4 per cent in June. It recorded 13.5 per cent in July 2018 and a whopping 33 per cent in July 2017. Core inflation, which strips out volatile items such as food, fell to 5.9 per cent in July from 6.4 per cent in June.
The decline was unexpected as it came in the same month as a fresh round of energy-subsidy cuts was introduced, translating into a jump of between 16 and 30 per cent in the prices of different fuels.
“It seems that the energy price hikes may have had a smaller effect than many anticipated. But inflation in most other price categories eased too, suggesting that underlying price pressures are weakening,” said William Jackson, chief emerging markets economist at Capital Economics, in a note.
Shuaa Securities focused on the fact that price increases on food and beverages, the dynamo of the inflation index, had been contained, recording only 0.5 per cent month-on-month in July. This was compared to more than two per cent registered after the previous subsidy cut.
According to the Shuaa research note, the recent decline proved that the flotation of the pound and the inefficiency of the market, as translated in prices’ tendency to adjust only upwards, were more powerful factors in determining inflation than the effects of fiscal discipline measures like energy subsidy cuts and various tax measures.
Shuaa said the exchange rate was probably the most powerful variable affecting inflation. The pound’s appreciation year-to-date explained a great deal of the inflation rate decreases that were being seen, it said.
The pound has gained almost nine per cent against the US dollar since the beginning of the year.
According to a survey done by Enterprise, an online news outlet, capital borrowed from the banks to be injected into industrial investments will not pick up until interest rates drop. “Our survey of nine companies across several industries found that businesses are waiting for interest rates to fall within pre-float levels of 10 to 13 per cent before ramping up borrowing,” it noted.
In its most recent report about Egypt, US investment bank Morgan Stanley noted that while big US tech firms were expanding in Egypt, and some are said to be in talks about opening data warehouses, three CEOs had said that foreigners were not likely to invest more heavily until private Egyptian companies did, and that has yet to happen.
Circumstances on the international front are even more easing-friendly, with increasing indicators that the global economy is heading for a slowdown.
The US bond market is recording negative yields resulting from a surge in bond prices as a decline in stock prices has pushed investors to look for safe havens like treasuries and gold.
Yields have plunged, as the greater the demand for bonds, the higher the price and the lower the yield. In simple terms, investors are paying a lot of money to buy relatively low-yielding short-term treasuries, because they consider these to be the least risky assets while the world is heading to a recession.
This is not happening in the US alone. According to Enterprise, yields on around $15 trillion of sovereign bonds, equal to a quarter of the global market, are now in negative territory. This number has almost tripled since October 2018 when $5.7 trillion of government debt was trading at negative yields.
“Rates plunged this week as fears of a global economic recession grew and central banks stepped up monetary easing,” it said.
Moreover, Chinese industrial output growth rates are the weakest in 17 years. Germany, another major player in the global economy, reported a decline in its economic growth rates as exports slumped, and Euro-area production plunged the most in more than three years due to cooling demand.
Oil prices have fallen about 15 per cent since late April when the US-China trade war started overshadowing the outlook for global growth. This, coupled with the political crises in Hong Kong and Argentine, increases the possibility that the world economy is heading for its weakest expansion since the 2008 financial crisis.
Moving to hedge against the repercussions of the above-mentioned factors, central banks are trying to support economies by reducing interest rates. The US Federal Reserve, India, Thailand and New Zealand all lowered interest rates in recent weeks. The European Central Bank is widely expected to follow next month.
While some may fear that Egyptian treasuries will lose their appeal if interest rates are cut, the fact that they are one of the highest yielding worldwide together with the fact that most economies are lowering their rates should maintain the local treasuries’ position.
According to Reuters, European insurers, which now invest close to 250 billion euros or five per cent of their assets in fixed-income assets, are fishing for Euro-denominated issuances in countries such as Egypt, Ukraine, Saudi Arabia, Indonesia, Serbia, Romania and Croatia.
*A version of this article appears in print in the 20 August, 2019 edition of Al-Ahram Weekly under the headline: ‘Easing-friendly’ mood on rates
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