HC expects CBE to cut interest 0.5% during its next meeting on 26 December

Hossam Mounir
5 Min Read
Monette Doss

A report issued by the Research Department of HC Securities and Investment expected that the Central Bank of Egypt (CBE)’s monetary policy committee (MPC) will cut interest rates by 50 basis points during its next meeting scheduled on 26 December.

Monette Doss, equity analyst in the Macro and Banking Sector at HC, said that monthly headline inflation declined in November driven by prices of food and beverage which has been decreasing by 1.51%, 1.81%, and 1.75% for three consecutive months of September, October, and November. This can be partially attributed to government efforts to cut the prices of basic food items offered on ration cards as well as avoid possible supply shocks. The government has also announced that it is planning to review the price of commodities (such as oil, sugar, flour, and rice) included in the ration card system quarterly, based on the EGP/USD rate and the price of commodities in international markets.

“As international prices of these commodities seem stable compared to last year averages, and due to EGP appreciation, we expect to see general price stability over the coming few months,” Doss said.

“Due to unfavourable base effect, however, we expect December annual inflation to increase to 7.3%, well below the CBE target of 9% (±3%) for 4Q20, providing room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity. That said and given the global context of monetary easing, we expect the CBE to cut rates by 50bps in its upcoming meeting.”

She noted that Foreign holding of Egyptian treasury bills declined to $14.9bn in October from $16.8bn in July, which happened concurrently with interest rate cuts in Egypt and emerging markets slow-down. Over the last week, however, the USA and China have announced reaching a phase-1 trade agreement which was followed by renewed inflows into emerging markets. Some $1.15bn were added to US-listed emerging market exchange traded funds (ETFs) that invest across developing countries in the week ending 13 December, up from $142m in the previous week, according to data compiled by Bloomberg. Some $490m were said to enter the Egyptian debt market on 16 December following the enhanced global economic scene, according to Egyptian banking sources, leading to EGP appreciation to EGP 16.03/USD currently, the highest rate since April 2017.

Doss expected increased inflows into the Egyptian debt market over the coming few months as it continues to offer high positive real interest rate compared to other emerging markets such as Turkey.

“We estimate Egypt’s real interest rate at 4.72% (using the latest 12-month T-Bill rate of 14.89%, our estimated 50bps rate cut, our average 2020 inflation forecast of 7.52% and a 15% tax on Egyptian treasury holdings by US and European investors) compared to Turkey’s real interest rate of 0.38% (using the latest 12-month T-bill rate of 12.18%, Bloomberg 2020 inflation consensus estimate of 11.8% and factoring in that Turkish treasury holdings are tax-free). It suggests a positive interest rate differential of 4.34% in favour of Egypt. The two countries have similar risk profile as implied by Egypt’s 5-year CDS of 292.1, and Turkey’s 5-year CDS of 287.5,” she explained.

At its last meeting on 14 November 2019, the MPC reduced rates by 100bps after undertaking rate cuts of 100bps and 150bps in September and August, respectively.

Egypt’s annual headline inflation accelerated to 3.6% in November from 3.1% in the previous month, with monthly inflation decreasing 0.3%, compared to an increase of 1.0% in October, according to the CBE.

Egypt’s annual core inflation also decelerated to 2.1% in November from 2.7% in the previous month, with the monthly core CPI decreasing 0.14%, compared to an increase of 1.1% in October, the CBE said.

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