The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) is scheduled to hold its last meeting for 2019 on Thursday to review the CBE’s interest rates.
Speculations are divided between the central bank maintaining the current interest rates or introducing a new, mild cut.
In the latest meeting in November, the CBE introduced new key interest rate cuts, for the fourth time in a row, by one percent (100bps) after the MPC decided to continue the monetary easing cycle, by which the overnight deposit rate, overnight lending rate, and the rate of the main operation went down to 12.25 percent, 13.25 percent, and 12.75 percent, respectively.
The discount rate was also cut by 100 bps to 12.75 percent.
A probable scenario
Speaking to Ahram Online, Amr El-Alfy, the head of research at Shuaa Securities, said he expects the MPC will not introduce more cuts in its final meeting for 2019, especially that the inflation rate has become under control, until now, clarifying that the economic growth will drive the new cuts in the future in case it performs better in 2020.
El-Alfy illustrated that if the MPC decided to introduce more cuts, it would not exceed 0.5 percent (50bps), bringing the total cuts to five percent (500bps) over 2019.
Interest rate cuts in 2020 will be driven by two key factors: a further decrease in inflation rate; and a lower cut in real interest rates, which are calculated without factoring in the inflation rate, as it should be around 4-5 percent instead of eight percent to encourage individuals and companies to borrow.
Meanwhile, macro-economic analyst at Prime Holding, a leading investment bank in Egypt, Mona Bedair told Ahram Online the MPC will keep the current rates fixed, as the key objectives that the CBE focused on were implemented successfully, especially those concerning curbing the inflation rate.
“The main reasons behind the significant decrease in the inflation rate in 2019 were fuel price hikes, supply commodities price increase, and the absence of demand pressure which resulted in slow private consumption, which has achieved less than one percent growth. But the inflation rate has started to rise slightly in October, according to CAPMAS data,” Bedair explained.
She noted that the core inflation rate will be doubled in December, rising from 3.7 percent to 6-7 percent, adding that it’s a normal occurrence triggered as a response to economic variables in the domestic market.
Bedair said the anticipated decision of maintaining interest rates will also be driven by the CBE’s willingness to consider and track the impact of the increasing core inflation rate on the market and how the latter will meet it, ending with continuing its monetary policy’s easing cycle through more cuts over 2020, ranging between 2-3 percent, one percent of which will be introduced during the first quarter of 2020.
Interest back to pre-flotation rates
Bedair expects interest rates to plunge back to its levels before the flotation of the Egyptian pound in November 2016.
She anticipates the move be taken before the advent of 2021 when interest rates will be cut by an additional one percent.
Interest rates before the flotation of the Egyptian pound had reached around seven percent.
Core inflation rate to peak in December
Radwa El-Swaify, head of research at Pharos Holding, foresaw that the MPC will maintain the current interest rates due to the increase in annual inflation rates since October, which will reach their peak in December.
Meanwhile, according to El-Swaify, the annual inflation rate dropped significantly in December 2018 by four percent. This is unlikely to happen this December. But the rise in inflation rate does not mean an increase in prices in the market but in the real inflation rate itself.
More cuts on the table
Banking expert Hani Abul-Fotouh said the MPC will cut the key interest rates on all levels for the fourth time in a row by 0.5 percent (50bps).
“Introducing more cuts is the most likely scenario thanks to the declining annual inflation rate, in addition to the decreasing beverage and food prices over the past three months. That is in addition to the initiatives the CBE announced recently, especially that aimed to reinvigorate the manufacturing sector, and the other initiative on consumer loans that eased restrictions on personal loans through raising the value of loan instalments financed by banks. These initiatives aimed at increasing employment and reinvigorating the domestic market, which is a good sign for the stability of the monetary policy,” according to Abul-Fotouh.
HC Securities and Investment expected the MPC will decide to cut interest rates by 0.5 percent (50bps) driven by the monthly headline inflation that declined in November thanks to the decreasing prices of food and beverage which have been lowered by 1.51 percent, 1.81 percent, and 1.75 percent over three consecutive months -- September, October, and November.
The MPC’s upcoming meeting will be the eighth convened to review interest rates in 2019. Since its first meeting this year, on 14 February, the committee cut interest rates four times with a total of 4.5 percent, or 450 basis points (bps).
In October, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced that the annual inflation rate declined to 2.4 percent, compared to October 2018 which recorded 17.5 percent, while the monthly inflation rate increased during October by about one percent to reach 105.1 points, compared to 104 points in September.
In November, the annual inflation rate recorded 2.7 percent, compared to 15.6 percent in November 2018, but the monthly rate inflation decreased by 0.5 percent in November, recording 104.6 points, compared to one percent in October.