CBE Expected To Cut Interest Rates To 14.75%: Capital Economics

In the wake of a notable decrease of Egypt's inflation rate, with the Central Agency for Public Mobilisation and Statistics (CAPMAS) announcing last week a drop to 8.7 percent, all hopes were pinned on a possible interest rate cut, especially that a meeting of the Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) will be held 22 August.

Capital Economics (CE) considers that there is a high probability of a cut in interest rates after the MPC’s upcoming meeting.

In its MENA Data Response, CE stated that the drop in inflation to a four year low YoY in July reinforces its view that the CBE will resume its easing cycle at its next meeting with a 100bp cut in the overnight deposit rate, to 14.75 percent.

“We expect that to be followed by an additional 100bp of cuts by year end,” CE added.

“The headline inflation rate, which covers urban consumers only, fell from 9.4 percent YoY in June to 8.7 percent YoY in July and is now below the mid-point of the CBE’s target range of 9.3 percent for end 2020.

The outturn was weaker than we had expected, as we thought it would be unchanged from June. This was the lowest rate of inflation since August 2015,” CE continued.

Electricity and fuel price hikes that took effect last month did push up housing and transport inflation respectively, compared with June, but the effect of these was small compared with that of fuel and electricity price hikes that pushed up inflation between June 2018 and May 2019.

Meanwhile, inflation in most other price categories was unchanged or fell between June and July, suggesting that underlying price pressures have continued to ease.

The data will reassure the CBE that July’s energy price hikes wouldn’t have much impact on inflation, either directly or indirectly through second-round effects.

“Accordingly, July’s inflation figures strengthen our view that the CBE will resume its easing cycle when it meets on 22 August. Easing is all the more likely given the external backdrop of concerns about weak global growth and the shift towards policy loosening by central banks elsewhere.

We expect a 100bp cut in the overnight deposit rate to 14.75 percent at next week’s meeting. We then expect it to be cut to 13.75 percent by end of 2019 and to 10.75 percent by end of 2020. That’s much more easing than most currently expect,” CE anticipated.

On the other hand, Trading Economics projected that Egypt’s inflation rate is expected to be 9.30 percent by the end of this quarter, according to global macro models and analyst expectations.

“Looking forward, we estimate the inflation rate in Egypt to stand at 9.60 percent in 12 months’ time. In the long-term, the inflation rate is projected to trend around 9 percent in 2020, according to our econometric models,” Trading Economics said.

In its last meeting, which was held 11 July, the MPC decided to keep the CBE’s overnight interest rate, overnight lending rate, and the rate of the main operation unchanged at 15.75 percent, 16.75 percent and 16.25 percent, respectively.

The discount rate was also unchanged, at 16.25 percent.