The Central Bank of Egypt (CBE) decided to keep its overnight deposit and lending rates at 14.75% and 15.75% respectively, while the CBE’s main operations and discount rates were both kept unchanged at 15.25%.
According to CI Capital, the CBE’s decision to keep policy rates unchanged following the 0.25% hike by the Federal Reserve System (FED) this month illustrates the independence of the new monetary regime adopted by Egyptian authorities. It also reflects the CBE’s view that the current level of interest rates on EGP denominated securities are sufficient in order to sustain foreign inflows in the treasuries market following the flotation of the pound in November 2016.
Consequently, a lower interest rate isn’t expected, due to a strong recovery in foreign ownership in one-year T-bills, which has exceeded $3.5bn in March 2017, compared to a mere $111m in October 2016. According to CI Capital, this recovery is expected to continue throughout 2017, albeit at a slower rate, mainly driven by the expected gradual appreciation in the exchange rate and a lower policy rate expected in H2 2017.
Moreover, CI Capital forecasts that the total foreign ownership in treasuries should reach $7.5bn in 2017 and reach its highest recorded value (prior to the 25 January Revolution) of $12bn during 2018.
By the end of FY 2016/17, CI Capital predicts that the current pressures on the Egyptian pound should ease, which, in turn, will lead to the pound’s appreciation and stabilisation in H2 2017. The current pressures on the pound should ease by the end of FY 2016/17, as they were driven by the seasonality in import activity and an incentive to attract remittances into the banking sector ahead of the holy month of Ramadan.
The CBE maintaining rates despite the high inflation rates recorded in February 2017 (30% and 33% respectively), are in line with CI Capital’s assumptions. Moreover, it is expected that the CBE will gradually start to cut policy rates in Q2 2017. Thus, CI Capital predicts that the 6% hike in policy rates undertaken since 2015 will be fully neutralised in FY 17/18.
