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Wednesday, 16 June 2021

Walking on thin ice, Egypt's central bank may cut interest rates on Thursday

Bankers and financial experts expect the CBE to introduce new cuts to key interest rates by between 0.5 percent (50 bps) and one percent (100 bps) during the MPC's Thursday meeting

Doaa A.Moneim , Thursday 16 Jan 2020
Central Bank
File Photo: Central Bank of Egypt's headquarters is seen in downtown Cairo (Photo: Reuters)

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to hold its first meeting in 2020 on Thursday to review interest rates.

The meeting was set to be held on 26 December 2019, but the CBE postponed the meeting until the boards of the CBE and MPC was completed under the presidency of Tarek Amer, the CBE governor.

The meeting comes amid Egypt's preparations to start a new round of negotiations with the International Monetary Fund (IMF) to discuss further cooperation after the completion of the IMF's Extended Fund Facility for Egypt through which it received a $12 billion loan.

The private sector and investors in Egypt and abroad are eyeing the coming meeting as they expect new cuts. However, the flow of investment which arises from the demand on treasury bills (T-bill) and bonds -- which registered $16.613 billion until June 2019 -- could be affected if the CBE introduces new cuts.

If new cuts are introduced

Bankers and financial experts expect the CBE to introduce new cuts to key interest rates by between 0.5 percent (50 bps) and one percent (100 bps).

Former vice chairman of Misr Banque Sahar El-Damaty told Ahram Online that the CBE is expected to cut interest rates by between 0.5 percent (50 bps) and one percent (100 bps), driven by significant foreign direct investments (FDIs), especially on T-bills and bonds, in addition to the headline inflation rate, which falls within the CBE's target.

“Although the headline inflation rate doubled in December to hit 7.1 percent, it remains within the scope of the CBE projection that targets headline inflation to reach nine percent. The recent rate reflects how the inflation is under control, and that there is no need to keep the current interest rates at their current levels. They ought to be cut stimulate investments and refresh the private sector which has suffered over the past three years due to the high interest rates,” El-Damaty explained.

She added that the Automatic Fuel Prices Committee’s decision to maintain fuel prices due to the stabilisation of global fuel prices will be a key driver for introducing new cuts.

Double-edged sword

El-Damaty said that introducing new cuts is a double-edged sword, however, as it means that interest rates on T-bills and bonds will be reduced. Consequently, the owners of these fiscal tools may sell them, what means that Egypt could lose these kinds of investments.

El-Damaty also expected the CBE to introduce about two percent (200 bps) cuts in interest rates throughout 2020, provided that global tensions are eased, and the prices of staple goods are decreased.

Meanwhile, banking expert Yasser Agiba expected the CBE will maintain the current interest rates due to the good performance of the headline inflation rate that is expected to be in line with the CBE's target of nine percent, plus or minus three percent, in 2020.

Agiba added that the CBE may first test investors' demand on T-bills and bonds before introducing new cuts, especially with the present global and regional tensions.

A report issued by HC Securities and Investment expected the CBE to decrease interest rates by one percent (100bps), adding that headline inflation is anticipated to record 5.7 percent over the coming six months, which is significantly less than the CBE target of nine percent in the fourth quarter of 2020.

Subsequently, according to the report, there is an ample room for introducing new cuts to stimulate Egypt’s economic growth and financial market activity, taking into account the current monetary easing policies adopted worldwide.

Senior economist at the research sector of EFG Hermes Mohamed Abu Basha expected a two percent (200 bps) cut in 2020/2021 with an anticipated inflation rate ranging between six percent and seven percent.

Keeping options open

Radwa El-Sweify, head of research at Pharos Holding, told Ahram Online that the CBE is expected to maintain interests at its current rates.

El-Sweify said global and regional tensions play a key role in the present developments, while foreign exchange flows to the Egyptian market due to the demand on T-bills and bonds will help maintain interest rates.

She added that the CBE will need to examine the 3.5 percent cuts that were introduced in 2019 and their repercussions on the market, clarifying that the headline inflation will remain high till the end of January, before it decreases to 5.5 percent in February.

She also expected that the CBE will cut interest rates by two percent (200 bps) or three percent (300 bps) in 2020.

The MPC’s upcoming meeting will be the first to review interest rates in 2020. The MPC held seven meetings in 2019 that resulted in reducing interest by a total of 4.5 percent (450 bps).

The CBE introduced the latest -- and third consecutive -- cuts in the wake of the fourth MPC meeting by one percent (100 bps).

The overnight deposit and lending rates were cut by 100 bps to 12.25 percent and 13.25 percent, respectively.

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