The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is expected to hold its ninth meeting of 2020, on Thursday, to review key interest rates amid expectations that the CBE could cut rates by up to 0.5 percent (50 pbs).
In September, CBE decided to cut the overnight deposit rate, overnight lending rate, and the rate of the main operation by 0.5 percent (50 pbs) to 8.75 percent, 9.75 percent, and 9.25 percent, respectively.
The discount rate was also cut by 50 basis points to 9.25 percent.
The new cuts were the first since the slashing of interest rates by three percent (300 pbs) in March amid the Covid-19 crisis, bringing total cuts to 3.5 percent (350 bps) during 2020.
Head of macro and financials at HC for Securities and Investments, Monette Doss, expects the CBE to cut the key interest rates by 0.5 percent (50 bps) on Thursday in order to stimulate private investment and consumption, in addition to driving GDP growth amid a likely second wave of the Covid-19 pandemic.
“We expect this to have almost no effect on foreign portfolio inflows in Egyptian treasuries, with its yields declining by only one percent (100 bps) since March, despite a total of 350 bps rate cuts by the CBE over the same period of time,” Doss added, speaking to Ahram Online.
Doss pointed out that October inflation figures could accelerate further to reach 4.2 percent Y-o-Y and 1.5 percent M-o-M driven mainly by the back to school season. However, it would still remain well below the CBE’s target of nine percent (+/- three percent) for the fourth quarter of 2020.
Egypt’s annual headline inflation rate doubled in October to reach 4.5 percent, up from 2.4 percent in October 2019, the Central Agency for Public Mobilisation and Statistics (CAPMAS) announced Tuesday. The monthly inflation rate increased 1.8 percent.
The notable increase in annual headline inflation rate is driven by a surge in school and university fees by 20 percent, in addition to the increase in the price of utilities and ready garments in domestic markets, and the huge increase in the prices of other activities, according to CAPMAS.
“We believe high unemployment levels and suppressed consumer spending are the main factors underlying low inflation levels, while monetary easing started to bear fruit in October as indicated by Egypt’s Purchasing Manager Index (PMI) coming in at 51.4, signalling economic expansion for the second consecutive month. Based on our October inflation forecast, we estimate Egypt’s real interest rates on short-term deposits and loans at 4.4 percent and 5.9 percent respectively, significantly above their 12-year average of -3.3 percent and 0.8 percent,” Doss explained.
Also, foreign portfolio investments in Egyptian treasuries recovered sooner than HC expected, reaching $21.1 billion in mid-October from $10.4 billion in May, which resulted in the increase in the Egyptian banking sector’s net foreign assets position to $2.06 billion in September, excluding the CBE, reversing a net foreign liability position of $1.09 billion in August, according to Doss.
Meanwhile, the head of research at Pharos Holding, Radwa El-Swaify, expects the CBE to pursue its monetary policy easing and therefore cut key interest rates by 0.5 percent (50 bps) on Thursday. El-Swaify told Ahram Online that October inflation figures showed rates within the limits set by the CBE, projecting the headline inflation rate to surge to five percent by end of 2020 and in the current FY2020/2021.
In an exclusive interview with Ahram Online published in October, the director for the Middle East and Central Asia (MCD) at the International Monetary Fund (IMF), Jihad Azour, said that Egypt’s inflation rate is projected to jump to 5.7 percent in 2020, and 6.2 percent in 2021.
The MPC is to hold its last meeting for 2020 on 24 December.