Capital Economics expects Egypt to cut interest rates in September

Nehal Samir
5 Min Read
An Egyptian vegetable seller is seen at a market in Cairo, Egypt June 15, 2016. Picture taken June 15, 2016. REUTERS/Mohamed Abd El Ghany

London-based economic research consultancy Capital Economics forecasted in a report that Egypt will resume its easing cycle at September’s Monterey Policy Committee meeting and that the overnight deposit rate will be lowered by a further 350 bps this year, taking it to 13.25%, and by another 200 bps in 2019.

Meanwhile, the agency forecasted that the Central Bank of Egypt will leave interest rates on hold at its Monetary Policy Committee meeting on 28 June.

The agency stated that the sharp decline in inflation in Egypt last month strengthened the inclination to cut interest rates.

“Policymakers seem reluctant to soften policy against the backdrop of future cuts in subsides, therefore the easing cycle will not resume until the end of the third quarter (Q3) of the calendar year 2018,” Capital Economics stated.

On Sunday, the Central Agency for Public Mobilisation and Statistics (CAPMAS) revealed in a press statement that Egypt’s annual inflation decreased to 11.5% year-over-year in May 2018, down from 30.9% in May 2017, a decrease of 19.4%.

Capital Economics stated that the latest figures reinforce the Central Bank of Egypt (CBE) to resume the easing cycle, pointing out that inflation is now below the midpoint of policymakers’ target, which is 13% ±3% by the end of 2018.

It said that although policymakers are eyeing the next subsidy cuts, Capital Economics doubts that interest rates will remain unchanged at this month’s Monetary Policy Committee meeting.

The CBE decided in May to leave interest rates unchanged due to the uncertainty surrounding subsidy cuts.

A fresh round of price increases are scheduled to be implemented by the start of the new fiscal year (FY) in July, leading to a temporary surge in inflation.

Capital Economics doubted that the CBE will refrain from cutting interest rates until subsidy cuts become clearer.

Moreover, the impact on inflation will not appear until July’s consumer price index is released in early August, it stated.

Capital Economics noted that the CBE’s credibility is ultimately improving but remains fragile.

“Thus, decision-makers will hesitate to cut interest rates at the Monetary Policy Committee meeting in August while the latest data will show rising inflation,” the agency stated.

The agency asserted that inflation should resume a downward trend later this year, allowing the CBE to move forward with interest rate cuts.

For his part, Tarek Fahmy, the CEO and managing director of Al-Tawfeek Leasing Company, told Daily News Egypt that the expected rise in the prices of gas, electricity, and fuel will lead to increases in the prices of commodities and services in the near future.

He continued that that the price increases of commodities and services will negatively impact inflation, in agreeing the agency that the CBE will keep interest rates unchanged in the near future, stating that inflation will increase after the rise in prices.

Fahmy commented on the agency’s expectation that Egypt will cut interest rates in September, stating that he cannot set an expectation now as it depends on the impact of price rises on inflation, which will not appear now, as it depends on the percentage of the increases, which is still not clear.

He added that two months after the price increases, we will be able to expect the direction of interest rates, as in that period, Egypt will be able to measure the impact of the price increases on inflation.

Fahmy asserted that the further the interest rate decreases, the more it will positively impact Egypt’s economy.

Noteworthy, after the pound’s flotation in November 2016, the CBE raised key interest rates three times, by a total 7%. The first time by 3%, directly after the flotation in 2016, then 2% in May 2017, and 2% in July 2017. In 2018, the CBE moved to slash interest rates by about 2%.

It cut interest rates by 1% (100 basis points) twice this year, first in mid-February and again in late March, bringing interest rates to 16.75% for deposits and 17.75% for lending, while at the most recent Monetary Policy Committee meeting, it decided to keep the interest rates unchanged.

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