CBE resumes monetary easing cycle, cuts interest rates by 150bps
The overnight deposit rate, the overnight lending rate, and the rate of the main operation are cut to be at 14.25 percent, 15.25 percent, and 14.75 percent, higher than economists’ expectations.
August's meeting is CBE's fifth meeting in 2019, which ended with cutting the rates amid a global wave of interest rates cut, decline of inflation rate to a four-year low, and the hovering prices of oil around $60 per barrel.
During July, May and March meetings, CBE kept the overnight deposit rate and the overnight lending rate at 15.75 percent and 16.75 percent, respectively, after cutting the rates during their first meeting in February.
In separate surveys conducted by Reuters, Bloomberg, and Enterprise, most economists expected CBE to cut rates during August's meeting.
Senior Economist at SHUAA Capital Esraa Ahmed attributed the decline to six main reasons, clarifying these reasons include the drop of headline and core inflation rates at four-year lows, global monetary easing in advanced and emerging countries, and oil prices which is hovering around $60 for a barrel, in addition to the need to spur private sector and investment, as well as Suez Canal Investment certificates.
The Central Agency for Public Mobilization and Statistics (CAPMAS) announced earlier that Egypt’s annual consumer price inflation rose to 7.8 percent in July 2019, compared to 13 percent in July 2018. Moreover, annual core inflation rate declined to 5.9 percent in July 2019, from 6.4 percent in June 2019, according to CBE's report.
Core inflation discounts or strips out certain categories that are considered more volatile.
Capital Economics also clarified that the drop in inflation to a four year low YoY in July reinforces its view that the CBE will resume its easing cycle at its next meeting with a 100bp cut in the overnight deposit rate, to 14.75 percent, expecting an additional 100bp of cuts by year end.
"We see no need to wait for another inflation reading, because even if August goes up, it would be for seasonal reasons, i.e. Eid al-Adha which might produce an increase in the price of meat (a core food item)," Ahmed noted.
She added that the impact of the recent increase in cigarette prices on the overall index will be marginal, due to trivial weight assigned to the item (2 percent of the whole index).
"Even if August inflation readings were higher than those recorded in July, we think the real positive deposit rate, being at around 7 percent, is enough for a reasonable cut of 100bps with no worries," she stated.
According to Ahmed, the recent global developments pave the way for CBE to resume the easing cycle such as the Fed's cut, and ECB, New Zealand's cut, in addition to cuts by emerging markets including Turkey and India. "Rate cuts already taking place in EMs in specific shield the competitiveness of treasuries in Egypt should it cut rates itself."
Continuous normalization of interest rates is imperative as Egypt's economy cannot count much on FDIs, as global protective measures have hit capital flows hard, she added, stressing the need for promoting private investments to maintain a much-needed high growth rate.
Related to Suez Canal investment certificates, around LE 60 billion is expected to be paid back to holders of the Suez Canal investment certificates early September, which may affect the inflation rate. "However, we don't think this poses a high risk to inflation as we believe the greatest portion of the withdrawn funds will be reinvested in bank deposits at the highest rates possible."
CAIRO - 22 August 2019: Amid a global wave of interest rates cut, decline of inflation rate to a four-year low, and the hovering prices of oil around $60 per barrel, Egypt's Central Bank (CBE) is expected to cut interest rates on Thursday's, August 22, meeting by around 100 basis points.