The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its second regular meeting this year to discuss the fate of key interest rates, which are the most important indicators of the pound’s interest rate in the Egyptian market in the short term.
This comes at a time when the banking market is in a state of uncertainty about the decision that the committee will make as domestic inflation eases while global interest on the dollar rises.
At its meeting held on 15 February 2018, the MPC decided to cut the overnight deposit rate, overnight lending rate, and the rate of the CBE’s main operation by 100 basis points to 17.75%, 18.75%, and 18.25%, respectively. The discount rate was also cut by 100 basis points to 18.25%.
In its statement, issued in relation to the interest rate decision, the CBE said that inflationary pressures have been contained, a consequence of tighter monetary conditions. This has been evidenced by relatively tame monthly inflation figures, despite being affected by the upward adjustments of regulated prices.
In a statement issued mid-month, the CBE said that the indicators issued by the Central Agency for Public Mobilisation and Statistics (CAPMAS) showed a decline in the annual inflation rate for seventh months in a row to 14.4% in February 2018, its lowest since October 2016.
It added that the decline comes in light of the CBE’s monetary policy, which prioritises maintaining low inflation rates in order to achieve sustainable economic growth.
“As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 100 basis points. This remains consistent with tight real monetary conditions, a necessary requirement to achieve the inflation target of 13% (±3 percent) in Q4 2018 and single digits thereafter,” the statement read.
It pointed out that, as part of its efforts to achieve this objective, the CBE used all available monetary policy tools in a proactive manner and based on a comprehensive analysis of all local and international variables.
The annual rate of general inflation peaked in July 2017, posting 33%, before beginning to gradually ease.
Osama El-Menilawy, the assistant general manager of the treasury department at a private bank operating in Egypt, said that the continuing low inflation in the domestic market supports a new cut in the CBE’s interest rate by 0.5-1%, but adding that the MPC is more likely to keep the interest rate unchanged on Thursday.
He explained that the CBE could fix the rate out of cautioun about foreigners selling their investments in local debt instruments as they become less attractive once interest rates are cut, which would impact the inflows of hard cash into the domestic market.
He added that the CBE may also fear the occurrence of dollarisation in the market again, in light of the trend of interest rates on the dollar rising, amid the existence of strong expectations of further increases in the coming period.
Meanwhile, HC Securities & Investment believes that the MPC will likely cut policy rates by 100 bps at its upcoming meeting on Thursday, referring to the core inflation in February, which matched the CBE’s target of 13% (±3 percent), sooner than expected.
Sara Saada, chief economist at HC, said that the eased inflation in February was not only due to the positive effect of the base year, but also due to an improvement in the general prices, which was highlighted by the average monthly inflation that scored 0.6% in the past seven months, compared to an average of 2.8% in the same period last year.
She added that this improvement in inflation was the main driver behind the CBE’s decision to embark on an expansionary policy cycle at its meeting in February 2018 after two years of deflationary policy.
“Although we expect energy prices to rise in July, which will lead to a rise in inflation, we do not see this as a reason to stop the expansionary monetary policy steps at the current stage,” Saada added.
She explained that, based on their expectations, cutting interest rates will not sway the CBE from achieving the target inflation in the last quarter of the current year.
She stressed the importance of continuing to implement expansionary policies to stimulate the growth of private investment and its impact on GDP, which she believes ensures more sustainable growth.
