Egypt's central bank to keep interest rates unchanged during 2021: Capital Economics



Sun, 20 Jun 2021 - 04:16 GMT


Sun, 20 Jun 2021 - 04:16 GMT

FILE - Capital Economics

FILE - Capital Economics

CAIRO – 20 June 2021: Capital Economics expected Egypt’s Central Bank to remain holding the interest rates unchanged in the near term, with anticipation that inflation will drop further below target in the fourth quarter which would re-open the door for easing late in the year.


It also expected that policymakers will reduce the overnight deposit rate by a total of 150bps the end of next year, taking it 6.75 percent. This is more easing than the consensus currently anticipates.


Capital Economics clarified that the policymakers will keep interest rates on hold for much of this year, adding that


It noted in a report that real interest rates, at around 3 percent, are among the highest in the emerging world.


Capital Economics also thought that inflation will slow in the fourth quarter and fall below the lower bound of the CBE’s target range.


“This should provide room for the CBE to lower interest rates,” it referred.


It referred to the CBE statement which stated that policymakers have become more positive about the economic recovery. Officials reported that Q1 GDP growth picked up from 2.0% y/y in the final quarter of last year to 2.9 percent y/y. However, while the CBE reported that more timely data point to a strong recovery “across the board”, the slow COVID-19 vaccine rollout risks weighing on the recovery.


The central bank also appears to have a keen eye on building inflationary pressures. Headline urban inflation rose from 4.1 percent y/y in April to 4.8 percent y/y in May, its fastest pace this year, and was driven by surging food inflation. Inflation is still far below the mid-point of the CBE’s target range of 7±2%, but the rise is likely to worry policymakers nonetheless, according to the statement.


Capital Economics also expected that the pound will weaken, pushing up inflation of imported goods. Since the 2016 devaluation, the pound has appreciated significantly and its recent stability has raised the possibility it may be overvalued.


According to the expectations, the pound will depreciate by 7 percent to 17.0/$ by end-2022.


Putting all of this together, Capital economics expects the headline inflation rate to rise and peak at around 6 percent y/y in September. This would put inflation back within the CBE’s inflation target range.


On June 17, the Monetary Policy Committee (MPC) decided, to keep the Central Bank of Egypt’s (CBE) overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged for the fifth time in a row at 8.25 percent, 9.25 percent, and 8.75 percent, respectively. The discount rate was also kept unchanged at 8.75 percent.





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