CBE to discuss interest rates for 1st time in 2019
After cutting the rates six times during 2018, most investment banks and economic researches foresaw that CBE will keep the rates unchanged as a step to have further reductions during the coming meetings to continue the easing cycle.
Analyst in Institutional Equity Sales at NAEEM Holding for Investment Mohamed Sameh explained to Egypt Today that CBE has two ways to decide whether to cut the interest rates or to keep them at the current rates, noting that these ways are foreign direct investment (FDI) and hot money.
As per hot money track, Sameh elaborated that CBE has to follow the advanced markets policy in interest rates which are going to raise their rates during the next period even if they have slowed it down recently, which pushes CBE to at least keep the rates.
He also noted that hot money can enter or exit the market anytime, so they would go for any movement in other markets, referring that about 40 percent exited the Egyptian market, declining from $21 billion to $11 billion.
Emerging markets were affected by an exit wave of foreign investments in government debt instruments during the second quarter of 2018 as the US dollar rose, raising fears from the economies of these markets, especially after the crises of Turkey and Argentina.
"To attract FDI, CBE has to lower the interest rates even if it could cause a shock, with the aim of sustaining development," Sameh said.
Meanwhile, Fitch Solutions, Beltone Financial, EFG Hermes and Pharos anticipated that the Central Bank will keep the interest rates at the current levels during February's meeting.
Fitch Solutions foundation expected that the Egyptian Central Bank of Egypt (CBE) will keep interest rates unchanged within the coming few months as the effects of subsidy cuts feed through to higher inflation.
Beltone Financial recapped its view that the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will keep interest rates unchanged during February meeting and fiscal year 2018/2019, as the inflation outlook will remain hostage to the uncertain trajectory of volatile food prices.
For his part, Head of Hermes' research sector Ahmed Shams told MENA that the CBE is not likely to make any interest deductions during the first half of 2019 because of the developments in world markets.
Pharos also said that the current reading of January makes the possibility to cut the interest rates this month weak. “We see that the possibility of lowering interest rates is weak, and if the committee takes a decision to reduce the rates, the ratio will probably not exceed 0.5 percent.”
SHUAA Securities Egypt reiterated its view that the monetary policy committee of the Central Bank of Egypt (CBE) might cut interest rates by 1 percent on Thursday, Feb. 14, attributing this view to the consistency of the inflation rate with the disinflation path.
The Central Agency for Public Mobilization and Statistics (CAPMAS) announced on Feb. 10 that Egypt’s annual consumer price inflation declined to 12.2 percent in January 2019, compared to 17 percent in January 2018.
All the aforementioned economic researches and reports attributed the hike in the monthly inflation during January to food prices due to a pick-up in vegetables and grains prices in particular.
CAIRO - 10 February 2019: Egypt's annual consumer price inflation declined to 12.2 percent in January 2019, compared to 17 percent in January 2018, state-statistics body said Sunday, Feb. 10. In December, Egypt's annual consumer price inflation recorded 11.1 percent, compared to 22.3 percent in the same month of 2017.
Pharos anticipated inflation rate to stabilize at 0.3 percent to 0.6 percent monthly and at 11.8 percent to 12.5 percent annually during the period of February to May 2019.
Beltone thought that the slight inch-up in inflation reading does not pose risks on our inflation outlook and therefore it reiterated its view that inflationary pressures will remain subdued over 1H19, particularly as the new low headline reading in December 2018 will accommodate inflation so as to remain within 14-15 percent throughout 2019.
Beltone’s also stated that its watch list includes: Foreign inflow in the fixed income in February to confirm the renewed investors’ appetite in the fixed income market, affirming limited pressures on the local currency; and the rate of depletion in banks’ NFAs, which started to ease in December 2018, defining the need to support the local currency.
CBE to continue easing cycle in 2019
Fitch Solutions expected that the CBE will decrease the interest rates in the second half as price pressures cool down, saying the pace of easing will likely be gradual amid more challenging external conditions and persistent risks of capital flight.
"We forecast the CBE’s overnight deposit and lending rates to end 2019 at 14.75 percent and 15.75 percent,respectively, implying a cumulative 200 basis points (bps) worth of cuts this year," Fitch Solutions said in a statement.
While Beltone left its expectations to the reading of inflation rates during the next two months for earlier interest rates cut in the first half of 2019.
“We reiterate our view that treasury yields will remain persistently elevated, above the pre-interest rates cut, disregarding interest rates policy direction for various other reasons,” it stated.
Moreover, EFG Hermes anticipated CBE to lower interest rates by 1 to 2 percent in 2019, with an average inflation rate to stabilize at 14 percent, which will boost the national economy and push forward investment rates.
The bank might mull a 1 or 2 percent cut of interest rates in the second half of 2019, EFG Hermes clarified, noting that foreigners' exit from treasury bills will not place any pressure on the central bank because their money was not used in financing the trade balance deficit.
Hermes pointed out that foreigners' investments in treasury bills surmounted $23 billion in the first quarter of 2018, but they had no big effect on the Egyptian economy. This means that when $11 billion of foreigners' investments in treasury bills exited at the end of the year, they also had no effect.
Hermes said Egypt's foreign cash reserves hit $45 billion in 2018, expecting the central bank to abandon its policy of increasing reserves in order to push forward investments.
Furthermore, Pharos Holding expected the Central Bank of Egypt (CBE) to cut interest rates by 1 percent during March meeting, elaborating that the dynamics of the local inflation rate and the foreign ownership of debt instruments enhance the chances of a rate cut in the first quarter of 2019.
“Cutting interest rates might form some pressure on the Egyptian pound, but with the current high price of exchange rate, the dollar will not exceed LE 18 as a result of this pressure and will not affect the inflation rate," it stated.
In previous research, Pharos expected the CBE to keep its overnight lending interest rate at 17.75 percent in 2H FY2018/19. “However, as the global monetary policy normalizes, we expect the CBE to gradually bring down its overnight lending interest rate to 15.75 percent in FY2019/20 and 13.75 percent in FY2020/21.”
Egypt which targets to hit average interest rates on the government’s debt instrument of 14.7 percent in the current budget, compared to an expected average of 18.5 percent in FY2017/18 budget, kept the overnight deposit rate and the overnight lending rate at 16.75 percent and 17.75 percent, respectively, during December’s meeting for the sixth time in 2018.
CAIRO - 27 December 2018: The Monetary Policy Committee of the Central Bank of Egypt (CBE) kept the overnight deposit rate and the overnight lending rate at 16.75 percent and 17.75 percent, respectively, during December's meeting for the sixth time this year.