The Monetary Policy Committee (MPC) will be holding its final meeting this year on Thursday to look into the future of the pound’s interest rate.
The meeting comes amid strong expectations by analysts and experts to fix the prices of basic yield in the Central Bank of Egypt (CBE), which are considered a prominent indicator of interest rate trends in the near term.
During the past three meetings held on 17 August, 28 September, and 16 November 2017, the MPC decided to fix the prices at 18.75% for depositing, 19.75% for loaning, 19.25% for credit and discount, as well as fixing the basic operation price of the CBE. This came after the MPC had increased the prices twice on 21 May and 6 July by 2% every time.
The MPC revealed that it plans to hold eight meetings to look into the destiny of the interest rates on the pound in 2018.
According to the committee, these eight meetings will be held on 15 February, 29 March, 17 May, 28 June, 16 August, 27 September, 15 November, and 27 December 2018.
Inflation is the main engine of all the decisions made by the MPC, in addition to other factors, topped by the rate of economic growth.
According to the latest CBE indicators, the annual rate of inflation reached 26% in November 2017, compared to 30.8% in October 2017. The monthly general inflation rate reached 0.97% compared to 1.10%.
The annual average inflation rate reached 25.5% in November, compared to 30.5% in October. Monthly inflation rate is 1.31% compared to 0.70%.
For his part, banking expert Hani Aboul Fotouh said that despite the continuous improvement in economic indicators and the decline in inflation, the MPC may not decide to reduce interest rates in its meeting planned to be held on Thursday.
Aboul Fotouh said that according to CBE data, as well as data from the Central Agency for Public Mobilisation and Statistics (CAPMAS), the inflation rate is still higher than the level with which the interest rate is allowed to be reduced.
Aboul Fotouh expected January 2018 to see a reduction in the interest rates by 500 basis points, that is 5%, if the inflation continued to decline.
Chief Economist of Research Deptartment at HC Securities and Investment Sara Saada said that despite the stabilisation in the monthly inflation figures, the MPC decided to keep interest rates on hold at its previous meeting.
This signals a very conservative stance on the imminent start of the easing cycle. Since the last MPC meeting, the EGP/$ rate witnessed some volatility, reaching EGP 17.85 after almost three months of stability at around EGP 17.65.
The movement to seasonality effects is attributed rather than weakening fundamentals as the first quarter of 2017/2018 showed a strong reported balance of payments with the current account recording an annualised deficit of $6.56bn, narrower than the annualised deficit of $19.13bn a year earlier and an actual deficit of $15.58bn in FY 2016/2017.
Additionally, the first quarter of 2017/20818 foreign direct investments almost fully covered the current account deficit, implying strong external position fundamentals.
Moreover, Zohr gas field’s initial production, which started in mid-December, will contribute to savings of up to $60m per month, with the savings set to increase as production increases, according to the minister of petroleum.
On the real economy front, Egypt’s real GDP growth accelerated to 5.2% y-o-y in the first quarter of 2017/2018 from 4.9% y-o-y and 3.8% y-o-y a year earlier.
Accordingly, HC remains confident in the sustainability of the improvement in the macroeconomic indicators and believe in an imminent start of an easing cycle.
However, with the relatively contained drawbacks of the high interest rate environment, as growth continues to accelerate and treasury yields (cost of borrowing) drop on the back of an easing cycle expectations, HC believes the CBE can maintain its conservative stance and keep interest rates on hold at its upcoming meeting and start the easing cycle in February. HC therefore expects the MPC to keep interest rates on hold at its upcoming meeting.