The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) postponed it’s 26 December meeting for the final time this year to decide on interest rates at the bank, and pushed it to 16 January. Bankers’ and analysts’ expectations differed about the meeting, after the MPC has cut rate four times since the beginning of 2019.
The committee decided in its last meeting on 14 November to cut rates by 1% to 12.25% for deposit, 13.25% for lending, 12.75% for credit, discount, and main operation rates at the CBE.
The CBE revealed earlier this month that the annual rate of core inflation decreased to 2.1% in November, compared to 2.7% in October, while the general inflation rate measured by the Central Agency for Public Mobilization in Statistics (CAPMAS) in cities increased to 3.6% in November, compared to 3.1 % in October. This rise in the annual general inflation rate is the first since May 2019, after witnessing a significant decline during the past five months. The CBE aims to achieve an annual inflation rate of 9% (±3%) on average, by the last quarter of 2020.
Tarek Metwally, a banking expert, said for the first time in a while, the possibilities of maintaining and reducing interest rates are equal.
He explained that the CBE may keep its rates unchanged after the bank has imposed four cuts this year and managed to control inflation in the recent period, noting that despite the rise of the monthly inflation rate again in December, it is still within the levels targeted by the CBE.
Metwally added that the US Federal Reserve’s decision to stabilise US dollar’s interest – after three consecutive cuts – also enhances the chances that the CBE would keep its rates unchanged.
However, he believes the possibilities of lowering the interests are also there to complement the monetary easing plan and support the market and investment activity, especially in light of the continuous decline in inflation rates. This gives the CBE more room for further rate cuts, given its impact on reducing the cost of local debt.
According to Metwally, the CBE is more likely to stabilise rates if the meeting was held in December, with the continuation of the monetary easing policy in the coming year.
A Reuters poll showed that the CBE was likely to keep key interest rates unchanged on Thursday since inflation increased in November, after falling near a 14-year low. Nine out of 14 economists expected that the CBE would keep interest rates unchanged, while four predicted a 50 bps cut, and only one saw a 100 bps cut.
Mona Bedir, chief economist at Prime Holding, said it is expected that the annual rate of inflation in cities will increase more in December, to end the year at about 7%, still less than the rate targeted by the CBE. Hence, it is likely that the CBE would prefer to keep interest rates stable at the next MPC meeting.
Wael Ziada, executive chairperson of Zilla Capital, said the exceptionally low inflation rate and the fact that the CBE allowed banks to increase loans to individuals indicate that the economic downturn policy may have exceeded its target during the period of implementation. Accordingly, the easing cycle is likely to continue, so he sees the MPC making another 50 bps cut.
Aliaa Mamdouh, director of macroeconomics and strategy at Beltone Financial, said that the average inflation rate is expected to reach 4.7% in the fourth quarter (4Q) of 2019, down from about 7% in 3Q of the year.
Mamdouh expected the interest rates to stabilise, while the CBE tests liquidity in the wake of significant cuts that were applied in 2019. She also anticipated it to absorb the impact of the displacement of fixed income portfolios, with the balance’s restoration to the portfolios at the end of the year as usual.
Radwa El-Swaify, head of research at Pharos Holding, expected the CBE will keep interest rates unchanged on their next meeting.
She said there are expectations for inflation rates to rise during December at a monthly rate of about 0.5% and to reach 6.5-7% annually, which will prompt the MPC not to move interest rates and to cut it again during 1Q of 2020.
She explained that the annual rate of inflation during November recorded 3.6% annually, which is slightly lower than expectations of 3.9%.
Noteworthy, the MPC decided in its 14 November meeting to reduce the basic interest rates by 1% to 12.25% for deposits, 13.25% for lending, and 12.75% for credit, discount, and operations rates.
Haitham Abdel Fattah, director general of treasury and financial markets at the Industrial Development Bank, said there is more than one reason that support the continuation of the CBE in its monetary easing policy, and the reduction of basic interest rates at the next MPC, while there is no single reason that requires fixing interest rates.
He explained that in terms of macroeconomic indicators, inflation rates still give a wide room for the monetary policymaker to make further reductions in basic interest rates, in light of the high real interest rate of 8%, which is the difference between inflation and interest rates, which supports the possibility of a further cut to target growth and stimulate the economy.
Besides the stability of inflation, the continuing increase in the country’s foreign exchange reserves and foreign investors’ growing interest in the government debt instruments, despite the beginning of the easing cycle several months ago, also support the possibility of further rate cuts, he explained.
Abdel Fattah pointed out that the recent auctions of the Ministry of Finance witnessed a high turnout by foreigners, reflected in the number of times the bids were covered, which reduced the return on treasury bills last Thursday.
On the other hand, the IHS Markit’s Egypt PMI, which measures the performance of the non-oil private sector, declined in November for the fourth consecutive month to 47.9%, compared to 49.2% in October, and recorded the lowest level since September 2017. This indicates a market slowdown that leads to strong drops in production and new orders, which also supports the CBE trend of a new cut in interest rates, reducing the cost of borrowing to stimulate the market.
Abdel Fattah emphasised that no pressures had been observed in the market that required maintaining interest rates without reducing or flushing in a competing emerging market for Egypt, making interest rate cuts disturbing to the appetite of foreign investors. On the contrary, the Egyptian debt market is still very attractive to indirect foreign investments.
He suggested that the monetary policymaker could make a reduction of 50-100 bps at the next meeting, pointing out that the slight decline in the exchange rate of the US dollar against the Egyptian pound during the recent period, as well as the decline in oil prices globally, may impact a new decrease in fuel prices by January 2020, which supports the stability of inflation readings.
Abdel Fattah ruled out a positive reflection of the interest rate cut on the real estate market or investment in assets, stressing that the acquisition of a property is linked to two main factors, purchasing power of individuals and the suitability of the asset price for this purchasing power.
He added that the consumers are aware that the value of real estate in Egypt is exaggerated, expecting a violent reverse movement in the real estate market within the next few months, whether by shifting investment away from above average and luxury housing, or reducing prices to match the real value of assets.
Local real estate developers in the last two years started to sell their properties in instalments with simple or zero down payments, but the market did not witness any improvement, and therefore he sees a reverse wave coming soon.