Beltone said that the decision made by the Central Bank of Egypt (CBE) on Thursday is a bold decision which would revive investments in all sectors, however, it is still too early for a real recovery for private investment, which does not put pressure on the Egyptian pound.
In a research note, Beltone said that the reduction of interest rates -which is greatly needed- will certainly improve confidence in the business environment, especially with local investors, however, it believes that utilising the potential of capital spending lending will require another cut in interest rates.
Beltone believes that the pressure on the Egyptian pound in 2019 will remain limited as the recovery of investment spending is still weak.
“The decision of the early reduction made by the CBE, despite the slight increase of inflation to 12.7% in January instead of 12% in December 2018, will pave the way for another decline in interest rates in the first half (H1) of 2019 before the automatic pricing mechanism of fuel prices is implemented,” according to Beltone.
“We believe that the forecast for inflation in February and March 2019 is a main factor which must be monitored, alongside with foreign flows in fixed-income instruments in February in order to watch the impact of reducing interest rates on yields, to make sure that investors are encouraged to invest in the market of the fixed-yield instruments. It is also essential to follow-up the depletion rate of foreign net-profit assets in banks, which started declining in December 2018. This would determine the extent of the need to support the local currency.”
Moreover, Beltone pointed out that the decision to cut the interest rates contradicted its predictions and markets’ estimates of keeping the rates unchanged, while the cut amount was compatible with its predictions, and came a little higher than the market’s estimates between 0.25-0.5%.
According to Beltone, the cut in the interest rates indicates the resumption of the expansionary monetary policy that the CBE began in February 2018, which confirms its predictions of the continuance of the CBE’s attempt to address the inflation pressures in H1 of 2019, especially that the low public inflation in December 2018 would help maintain the inflation rates between 14-15% in 2019.
“Cutting the interest rates was one of the key motives we were looking forward to, in order to keep the market’s uptrend,” Beltone said, adding that the other two motives are represented in successfully implementing the governmental offerings programme, and reinstating the balance between indexes of MSCI/FTSE/EGX30.
“We believe that cutting the interest rates by 1% will push the market up, and provide more liquidity,” Beltone added.
Furthermore, it was stated, “We do not expect the treasury bills’ yields to reflect the policy of full interest rates cut for a long time, as we may witness a downward pressure only during next week’s auctions. Meanwhile, we still expect reinstating the treasury bonds’ revenues at a range higher than 18%, after limited downward pressures during the rest of February, regardless the trend of the interest rates policy.”
“We expect the Egyptian market of fixed-income instruments to remain attractive, amid strict monetary policy conditions in the rising markets, especially in the light of the policy to boost the economic stability, which would guarantee foreign currency inflows in favour of raising the Egyptian pound’s value,” it added.