The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) will, on Thursday, hold the first of its eight periodic meetings for 2021, to discuss the country’s interest rates.
These rates serve as the most important indicator of the direction interest will take in the local market in the short term.
The year 2020 witnessed the largest rate cut, of 4%, as the CBE reduced interest rates by 3% in March, in an attempt to contain the effects of the novel coronavirus (COVID-19) epidemic. Interest was further reduced in September and November, by 0.5% each time.
In its last meeting for 2020, the MPC decided to maintain the deposit and lending rates at 8.25% and 9.25%, respectively.
While it has yet to announce inflation indicators for January 2021, the CBE revealed that the basic consumer price index recorded at a monthly rate of zero in December 2020.
This remained unchanged from November 2020, and compared to 0.2% in December 2019. The annual rate of core inflation was 3.8% in December 2020, compared to 4% in November 2020.
The urban consumer price index announced by the Central Agency for Public Mobilization and Statistics (CAPMAS) recorded a monthly rate of 0.4% in December 2020. This compared against a negative monthly rate of 0.2% in December 2019, and a monthly rate of 0.8% in November 2020.
The annual rate of general inflation was 5.4% in December 2020, compared to 5.7% in November 2020. The CBE targets inflation at 7% (±2%) by the end of the fourth quarter (Q4) of 2022.
Banking expert Mohamed Abdel Aal said that keeping rates unchanged, while leaving the door ajar for a future cut, will be CBE’s move on Thursday.
He added that, although we can expect interest levels to remain at their current level, Egypt’s monetary policy in relation to the rate of return will continue a long-term stimulus monetary policy. This is in line with the state’s strategy to accelerate and stimulate growth and gradually recover the economy, whilst focusing on encouraging financing and investment.
He explained that the expected inflation rate during the coming months will be one of the main factors in determining interest rate trends, which are expected to remain stable. This comes as part of the CBE’s new target of 7% (±2%) until the end of 2022, pointing out that there may be marginal changes in the rates of inflation. However, the MPC will remain keen to keep inflation at single digits.
“Another important factor that can affect interest rate trends is the extent to which the economy needs to inject new liquidity, and the extent to which companies and individuals use the approved lending limits for them, whether at official lending rates or at initiative rates,” Abdel Aal said.
He added that it is also important to take into account the need to balance interest rates for the household sector, and to ensure reasonable real income. This will help stimulate the derivative demand for goods and services, in order to avoid the risks of generating or being exposed to any aspects of recession.
“In my opinion, the growth of the Egyptian economy now may not require a new reduction in interest rates, as much as it needs more stimulation of public spending,” Abdel Aal said, “This will come through national projects that drive the forces of the private economy, and an increase in demand for goods and services.”
He added that, in terms of what is happening on the ground, we notice that the real return continues to rise, due to the low inflation.
On the one hand, this gives the MPC room to further reduce interest rates, but on the other, the CBE may give more attention to the importance of preserving foreign exchange flows from all sources.
This may ensure that the MPC prefers, in most cases, to fix the interest rate, especially since attention is directed at the same time, to stimulate consumption, which requires granting appropriate interest rates to the family sector.
Abdel Aal added that the decision to fix the interest rate may also come from the need to preserve the local currency’s attractiveness to Egyptian expatriate workers and foreign investors in government debt securities.
At the same time, it will allow for the study of potentially using other monetary easing tools as a temporary alternative. This will come if more liquidity is required to be pumped into the arteries of the economy, without the need to reduce the interest.
HC Securities and Investment shared their expectations on the likely outcome of the MPC meeting. The company noted that, based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.
Monette Doss, Head of Macro and Financials at HC, said, “We expect January inflation to come in at 5.2%, near the lower end of the CBE’s new target range of 7% (+/- 2%) for Q4 of FY 2019/20.”
“However, we perceive upward interest rate pressures as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions,” Doss added, “In this regard, we note that Egyptian treasuries are now facing higher competition from Turkey which increased its policy rates by 200 bps on 24 December, taking its 15M treasuries to 15.97% up from an implied rate of 10.66% previously.”
She also said that given Bloomberg estimates 2021 inflation in Turkey will stand at 12.2%, the country’s treasuries now offer 3.8% real return similar to Egypt’s real return of 3.8%. This is given Egypt’s 12M yields at 12.99%, 15% tax rate for American and European investors and HC Securities’ 2021e inflation forecast of 7.2%.
On a different front, banking sector liquidity, as indicated by the CBE deposit auctions, declined to 11% of total local currency deposits in November 2020, down from 13% in October.
Doss said her company believes that the high-risk business environment currently poses upward interest rate pressures. Even though the Egyptian economy has shown high resilience in absorbing the repercussions of the pandemic, global uncertainty has had a toll on different sectors in Egypt especially tourism and export-related sectors.
“This in turn increases their risk, whilst also posing interest rate pressures,” Doss said, “That said, we expect the MPC to keep rates unchanged in its upcoming meeting on 4 February.”
Radwa El-Swaify, Head of Research at Pharos Holding, sees the opportunity for a 50bps cut on the February and October MPC meetings.
“February is a good time, since it will precede the upcoming wave of inflation,” El-Swaify said, “It will also provide support for the fiscal budget, businesses, and economic growth at the beginning of the year.”
She added that Pharos Holding sees a chance for another 50-75 bps cut on the October MPC meeting, bringing total cuts during the year to 100-125 bps and leaving real rates around 1%.
“We expect urban inflation to record 0.8% MoM and 5.5% YoY in January 2021, which will be the lowest recording for the year,” El-Swaify said.
She noted that inflation will start an upward trend in February 2021, to record an average reading of 6.9% in 2021, which is in line with the CBE’s two-year target of 7% (±2%). Pharos Holding expects an average urban inflation reading of 6.4%, 6.8%, 7.5%, and 7.0% in Q1, Q2, Q3 and Q4 of FY 2020/21, respectively.
