Monetary Policy Committee reviews CBE interest rates Thursday

Doaa A.Moneim , Wednesday 19 Feb 2020

A decrease in interest rates is ruled out by most analysts, though further cuts this year are likely

Monetary Policy Committee reviews CBE interest rates Thursday

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) is scheduled to meet Thursday, for the second time in 2020, to review key interest rates, amid expectations that no changes will be decided on.

In its last meeting, held 16 January, the MPC decided to retain the overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 12.25 percent, 13.25 percent, and 12.75 percent respectively.

The discount rate was also kept unchanged at 12.75 percent.

Head of research at Pharos Holding, Radwa El-Sawify, expects the CBE will keep interest rates at current levels without introducing new cuts driven by the current macroeconomic signs, especially the rate of inflation.

Egypt's annual consumer price inflation rate rose to 7.2 percent in January 2020, up from 7.1 percent in December 2019, driven by hikes in prices in the main consuming sectors, including food and non-alcoholic beverages (2.6 percent up from 1.8 percent in December), fruits and vegetables (10.3 percent up from 10 percent), and transport (16.3 percent up from 16 percent).

The annual core inflation rose to 2.7 percent from 2.4 percent in the previous December, while on a monthly basis, consumer prices jumped by 0.7 percent, after declining 0.2 percent in the previous month.

El-Sawify told Ahram Online that the CBE is still studying the impact of the cuts that had been introduced to interest rates over 2019 and inflationary performance, asserting that there is no room for introducing new cuts in Thursday's meeting.

It is expected that MPC's April meeting will see new cuts, unlike January's and February's meetings, according to El-Swaify, clarifying that the CBE is expected to introduce interest rates cuts of two percent, 200 bps and up to three percent, 300 bps, over 2020.

For inflation, El-Swaify told Ahram Online that it is expected to fall to 5.5 percent on an annual basis, and 0.6 percent in February on a monthly basis, but it is projected to rise yet again to record six percent and up to right percent by the fourth quarter of 2020.

El-Swaify said that inflation is expected to record 5.4 percent by the end of FY2019/2020.

Banking expert Hani Abou Elfotouh told Ahram Online that despite the increase in inflation rate for three consecutive times, it was a slight increase and is expected to drive the CBE to introduce interest rates cuts.

"According to CBE data, it projected that the inflation rate will see a slowdown in 2020, which could encourage the CBE to assume its monetary easing policy by cutting interest rates, but as of the second quarter of 2020." Abou Elfotouh explained.

Analysts at Prime Holding expect that the CBE will introduce new cuts of 0.5 percent, 50 bps.

According to a Prime report, sent to Ahram Online, this expectation is lead by the recent annual urban headline inflation rate, which remains under check as of end of January 2020, +7.2 percent, and at the lower end of the CBE target range, 6-12 percent by the fourth quarter of 2020.

Furthermore, the annual core inflation rate remains exceptionally low at 2.7 percent in January 2020. Both figures were largely driven by seasonal factors related to the food basket, the report said.

Either way, the weak performance of the equity market and sluggish durable goods sales, particularly passenger cars, suggest that inflation expectations are well anchored.
In addition, the latest auction of three million and nine million T-bills, which was conducted 16 February 2020, had an impact.

According to figures released by CAPMAS on 15 February 2020, unemployment has been steadily rising since hitting a cyclical bottom of 7.5 percent during the second quarter of 2019. The rate rose to 7.8 percent during the third quarter and yet again to 8.0 percent during the final quarter of 2019, CAPMAS said.

The third MPC meeting is scheduled to be held 2 April.

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