The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is anticipated to hold its first meeting in 2020 on Thursday to review the key interest rates.
In its last meeting, held on 24 December, the MPC decided to keep the CBE’s key interest rates unchanged to stand at 8.25 percent, 9.25 percent, and 8.75 percent for overnight deposit rate, overnight lending rate, and the rate of the main operation, respectively.
The discount rate was also kept unchanged at 8.75 percent.
Observers diffrer in their expections on whether the CBE will maintain the current interest rates, especially given that neither the CBE nor the Central Agency for Public Mobilisation and Statistics (CAPMAS) have announced their calculations for the annual and monthly headline inflation for January.
It is also unclear to some whether the CBE will introduce new cuts in interest rates with the expected rise in inflation rate or not.
During 2020, the CBE slashed interest rates by a total of 4 percent (400 bps) in response to the COVID-19 crisis and its associated impacts.
HC Securities & Investment expected the CBE to keep the current interest rates based on its projections for January’s annual headline inflation rate of 5.2 percent, which is near the lower end of the CBE’s new target range of 7 percent (+/-2 percent).
Following the MPC’s meeting in December, the CBE reset its inflation target to be at 7 percent (±2 percentage points) on average during the fourth quarter of 2022, down from 9 percent (±3 percentage points) on average that was targeted for the same quarter.
The CBE explained the action was made to continue to support macroeconomic stability.
Yet, HC perceived upward interest rate pressures, as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions.
“In this regard, we note that Egyptian treasuries are now facing higher competition from Turkey, which increased its policy rates by 2 percent (200 bps) on 24 December, taking its 15M treasuries to 15.97 percent, up from an implied rate of 10.66 percent previously”, according to Monette Doss, head of HC’s macro and financials.
On the other hand, the banking sector’s liquidity, as indicated by the CBE’s deposit auctions, declined to represent 11 percent of total local currency deposits in November from 13 percent in October, according to Doss.
Moreover, the current high-risk business environment poses upward interest rate pressures, said Doss.
Also, despite Egypt’s economy showing high resilience in absorbing the repercussions of the COVID-19 crisis, global uncertainty has had its toll on different sectors in Egypt, especially tourism and export-related sectors, increasing their risk and posing interest rate pressures, according to Doss.
On another front, Radwa El-Swaify, head of research at Pharos Holding, expected the CBE to cut the key interest rates by 0.5 percent (50 bps) in the upcoming meeting and in MPC's next October's meeting as well.
“February is a good time, since it will precede the upcoming wave of inflation. It will also provide support for the fiscal budget, businesses, and economic growth at the beginning of the year,” said El Swaify.
El-Swaify’s expectations build on her projections for the annual and monthly headline urban inflation.
“We expect urban inflation to record 0.8 percent (M-o-M) and 5.5 percent (Y-o-Y) in January 2021, which will be the lowest recording for the year,” El-Swaify projected.
She also expected that Inflation will start an upward trend in February 2021 to record an average reading of 6.9 percent in 2021, which is in line with the CBE's two-year target of 7 percent (+/-2%).
Going forward, El-Swaify expected an average urban inflation reading of 6.4 percent, 6.8 percent ,7.5 percent, and 7.0 percent 1Q21, 2Q21, 3Q21, and 4Q21, respectively.
Accordingly, El-Swaify noted that there is room for another 0.5 percent, up to 0.75 percent, through the October MPC meeting, bringing total cuts during the year to 1 percent, up to 1.25 percent, and leaving real rates around 1 percent.
In December, Egypt’s annual headline inflation declined to its lowest since October 2020, reaching 5.4 percent, down from the 5.7 percent in November, according to CAPMAS.
Monthly inflation in urban areas witnessed a slowdown by 0.4 percent, reaching its lowest level in 18 months, after having expanded by 0.8 percent in November, according to CAPMAS.