Will CBE continue its easing cycle Thursday?

CAIRO - 26 September 2019:The harsh decline in inflation in August and the continuation of the global monetary easing cycle support Egypt's trend to prolong cutting the rates during September's meeting on Thursday, Sep. 26.

Analysts go for cutting the rates but expect it not to be as aggressive as it was in August.

On August 22, the Monetary Policy Committee of the Central Bank of Egypt (CBE) cut the overnight deposit rate, the overnight lending rate, and the rate of the main operation by 150 basis points. The overnight deposit rate, the overnight lending rate and the rate of the main operation were cut to be at 14.25 percent, 15.25 percent, and 14.75 percent, higher than economists’ expectations.

Senior Economist at SHUAA Capital Esraa Ahmed expected CBE to continue the easing, referring that "all factors are favorable for a not-so-aggressive rate cut, perhaps 50-100bps."

"There is a reason we say 'almost', as the CBE may prefer to pause its 'strategic' long-term easing process for some 'tactical' reasons," Ahmed added in a research.

By hitting the lowest levels in 6years, both headline and core inflation leave an ample area of real interest rates, which hovers again around 6.75 percent, according to Ahmed.

The Central Agency for Public Mobilization and Statistics (CAPMAS) announced earlier that Egypt’s annual consumer price inflation declined to 6.7 percent in August 2019, compared to 13.6 percent in August 2018. Moreover, annual core inflation rate declined to 4.9 percent in August 2019, from 5.9 percent in August 2018.

"That is, the CBE can comfortably cut rates while maintaining tight positive interest rates," Ahmedstated.

Ahmed added that the latest cuts by the Fed and the ECB, China, Indonesia, Turkey, and a potential cut by BoJ in October—all make favorable winds for a similar move in Egypt.

"In general, we do not find the recent adverse developments in the global oil market much worrisome. After a short-lived hike in oil prices, Brent crude has retreated again to the early 60’s a barrel, well below the $68 planned in Egypt’s budget," Ahmed stated regarding oil prices.

"Speaking of oil, we do not see any increase in the fuel retail prices forEgypt’s consumers, coinciding with the expected implementation of the pricing mechanism in Q4 2019. Rather, we seethe stronger EGP and relatively low global oil prices during Q3 2019 (July-September) suggest that any price shifts couldbe downwards. That is, we rule out inflationary pressures stemming from any price shifts … for now," Ahmed added.

She clarified that the Egyptian stock market’s recent heavy losses triggered by fears of some political risk could ring the bell for the CBE, anticipating that CBE may try to avoid any similar outflow from treasuries,with lower yields potentially hurting foreign investors’ appetite in the coming period.

"Although there is a possibility that the CBE could prefer holding rates for 'tactical' reasons waiting for a better timing, we think – according to our view and in view of the above factors – the overall picture is conducive to a 50-100bps rate cut," Ahmed noted.
Macroeconomic analyst at Prime Holding Mona Bedair expected in a report Wednesday that CBE would cut the rates by 0.5-1 percent during September's meeting,adding that the decline in inflation and the global easing cycle open the door for more rate cuts in Egypt.

Bedair clarified that the current inflation environment and the global monetary easing cycle offer a golden opportunity for CBE to maintain the monetary easing cycle.

In a survey of 15 economists conducted by Bloomberg, they all went for a rate cut during September's meeting, but analysts are split about just how much easing the central bank can afford. In August, policy makers delivered a cut of 150 basis points, the first in six months and their biggest since 2017.

"Most see a decrease on Thursday of 1 percentage point in the benchmark deposit rate to 13.25 percent, with other expectations ranging between 50 and 200 basis points," according to Bloomberg.

Bloomberg stated that Standard Chartered Plc lowered its call from 150 to 100 basis points, saying Egypt’s central bank is “likely to opt for a cautious cut" as “media reports of protests in Egypt risk unnerving markets.”

An independent economist in Cairo Rehamel-Desoki predicted a cut of between 50 and 100 basis points, citing “global economic conditions and political developments,” which could prompt a slower easing cycle, according to Bloomberg.

A “more conservative outcome could be to hold rates unchanged this meeting until market volatility subsides and to embark on a more accelerated easing cycle into the fourth quarter or early in 2020,” Desoki said.

A Mideast economist told Bloomberg that “a larger-than-expected drop in inflation and looser global policy will allow the central bank to continue its easing cycle. But, recent political protests might get in the way of deeper rate cuts.”

Moreover, All 11 economists polled by Reuters predicted a cut. Five said the Central Bank of Egypt would clip rates by 100 basis points (bps), three predicted 150 bps and another three 50 bps.