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CBE expected to cut interest rates further by end-2019: report - Daily News Egypt

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CBE expected to cut interest rates further by end-2019: report

Inflation is likely fall to rates rarely seen over the past decade

A recent report issued by Capital Economics expects the Central Bank of Egypt (CBE) to cut interest by 650 base points by the end of 2019, as inflation is expected to extend its downwards trajectory in the few years to come.

Egyptian inflation dropped from a 30-year high of 33.0% year-over-year in July last year to 17.1% y-o-y in January.

“That has largely reflected the unwinding impact of the pound’s 50% devaluation against the dollar in November 2016. By our estimates, fading currency effects explain at least half of the decline in inflation so far,” the research firm noted.

With regards to falling inflation, “this process has further to run. But once the devaluation impact has washed out, there are a couple of other factors that will keep inflation subdued. One is that there is some spare capacity in the economy due to weak growth since 2011. If we assume potential GDP growth of 4.5%, that would imply an output gap equal to 3-4% of potential GDP. This slack means that output can be raised without stoking price pressures,” the research firm added.

According to the London-based consultancy, the rise in credit facilities to the government resulted in an increase on the asset side of the CBE’s balance sheet, with a counterpart on the liability side of a credit to the government’s deposits at the CBE.

“As the government spent this money, bank deposits at the CBE were credited which led to a rise in the monetary base. With more money chasing the same amount of goods, this resulted in higher prices—core inflation was 4% higher during the period of deficit monetisation than in previous years.”

“The upshot is that, by 2019, inflation is likely to fall to rates rarely seen over the past decade and be weaker than most anticipate. That should enable the CBE to undertake a substantial, albeit prolonged easing cycle—we expect a further 650 basis points of rate cuts by end-2019.”

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