The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its third regular meeting this year on Thursday to discuss the fate of key interest rates, which is the most important indicator of the pound's interest rate in the Egyptian market in the short term. This comes at a time when the market is dominated by strong expectations of a new cut as inflation continues to fall. On 29 March 2018, the overnight deposit rate, the overnight lending rate, and the rate of the CBE's main operations were each cut 100 basis points (bps) to 16.75%, 17.75%, and 17.25% respectively. The discount rate was also reduced by 100 basis points to 17.25%. In its statement, issued in relation to the interest rate decision, the CBE said that inflationary pressures have been contained; a consequence of tighter monetary conditions. This has been evidenced by the relatively tamed monthly inflation figures, despite being affected by the upward adjustments of regulated prices. "As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 100 basis points. This remains consistent with tight real monetary conditions, a necessary requirement to achieve the inflation target of 13% (±3%) in Q4 2018 and single digits thereafter," the statement read. The MPC noted that the domestic risks surrounding the future outlook for inflation are the timing and magnitude of possible measures to reform the subsidy system, as well as the demand-side pressures and the risks posed by the global economy of rising crude oil prices as well as the pace of tightening global monetary conditions. In a previous statement, the CBE said it was pursuing a monetary policy that prioritises low inflation rates in order to achieve sustained economic growth. It added that it began to gradually shift to the inflation targeting system by setting the target annual inflation rate in the last quarter of 2018 at 13% ±3%, then single digits, noting that, in the pursue of that goal, it will use all available monetary policy tools in a proactive manner and based on a comprehensive analysis of all local and international variables. The annual rate of general inflation peaked in July 2017, posting 33%, before beginning to gradually ease. On Thursday, the CBE disclosed its annual inflation rate of 11.6% at the end of April 2018 compared to 11.59% in March 2018. The monthly average inflation rate was 1.1% in April versus 0.7% in March. The Central Agency for Public Mobilisation and Statistics (CAPMAS) recorded a monthly average consumer price index of 1.5% in April compared to 0.99% in March. The annual rate of inflation was 13.1% compared to 13.32% during the same period. The market is waiting for a detailed statement on market developments by the CBE by mid-May. Tarek Metwally, former deputy managing director and board member of BLOM Bank Egypt, said that the MPC is likely to cut key interest rates by 1%. He explained that the committee will take the decision based on the continuous decline in inflation during the previous months, as well as the continuous improvements in foreign exchange reserves, which supports the position of the local currency against the dollar, in addition to the CBE's target to stimulate markets and increase investment rates to create more jobs. Banking expert Hany Aboul Fotouh When he was asked about whether foreign investments in Egyptian debt instruments would be affected by a new cut for the pound or not, Metwally said that the recent period witnessed a marked decline in the return on debt instruments, yet there was no negative impact on foreign investments in these instruments. He added that the interest on Egyptian debt instruments is still attractive to foreign investors compared to the return on any other investments for them, taking into account that the risk of investment in Egypt is now much lower as the economic situation improves. "Despite the government's intention to increase the price of fuel and the consequent rise in the prices of transportation, communications, and some other goods, and despite the inefficiency of the market and the presence of greed that had an effect on inflation, the CBE is expected to successfully realise its 13% (±3%) inflation target by the end of the year," he added. According to the banking expert Hany Aboul Fotouh, the MPC will cut interest rates on Thursday in view of the continued gradual decline in inflation. Aboul Fotouh added that the CBE may raise interest rates again later to absorb the inflationary effects that are likely to occur with the coming period of Ramadan and reduce subsidies on petroleum and electricity. He pointed out that the financial statement of the state budget submitted by the government to parliament revealed the direction of the government to reduce subsidies on petroleum and electricity, in line with the framework of the plan to gradually remove energy subsidies completely by the end of 2019, as per the agreement with the International Monetary Fund. "The CBE's decision on interest will take into account the core inflation rate for April 2018. The target inflation rate is 13% (±3%) by the end of 2018," he noted. Moreover, he added that this target, despite its flexibility, may be slightly exceeded, in accordance with the extent of the inflationary violence that could occur, if it is decided to proceed with measures to lift subsidies on petroleum and electricity, and is dependent on the ability of the government to control markets and prevent harmful practices that exploit conditions to hike prices for profit. As for government debt instruments, he said that they are still attractive to foreign investors despite the low return on them, pointing out that the value of foreign investments in government debt instruments amounted to $23.1bn by the end of March 2018, according to a statement from the Ministry of Finance. According to the Ministry of Finance, the average interest rate on government debt instruments in the 2018/2019 budget will be 14.7% compared to 18.5% expected in 2017/2018. "This decline is not expected to have an impact on the appetite of foreign investors to invest in government debt instruments, because interest rates are still considered profitable compared to returns in other markets," he explained. He added that the CBE should take into account the gradual decline in interest rates to avoid foreign investors ceasing to invest in Egyptian government debt instruments. Osama El-Menilawy, the assistant general manager of the financial sector at a private bank operating in Egypt Osama El-Menilawy, the assistant general manager of the financial sector at a private bank operating in Egypt, had a different opinion, saying that the MPC will keep the interest rates unchanged. He explained that maintaining the current interest rate is realistic and logical, as there is a direction by the government to institute a new increase in fuel prices during the coming period and the consequent occurrence of an inflationary wave may prompt the CBE to raise the interest rate again. He expects this new inflationary wave to occur before July 2018, especially with the advent of the month of Ramadan, when the prices of most food commodities usually increase with the increase in demand. Beltone Financial had previously expected the CBE to make a new cut to the pound interest rate by 2% by the end of the current fiscal year (FY) 2017/2018. "We confirm our expectations that the overall cut in interest rates will reach 400 basis points in FY 2017/2018, which were kept in the first half due to the increased inflationary pressures with lower fuel subsidies expected in the third quarter of 2018," Beltone said. Sara Saada, chief economist at HC Brokerage, said that the CBE's decisions to cut interest rates by 100 bps in both February and March were positive moves, marking the start of an easing cycle, adding, "the CBE is expected to continue easing, though at a cautious pace, as the government is not yet done with its fiscal consolidation plan, which poses inflationary risk over the short term. However, HC expects the easing cycle to be rational and to take a long time," she added. "Given the lagged effect of policy rate movements on inflation and the possible rise in monthly inflation ahead of Ramadan and the partial lifting of energy subsidies in July, we believe that the CBE will not cut rates further in the second and third quarters of 2018, and to proceed with easing in the fourth quarter of 2018. That said, we do not see the easing cycle posing capital flight or currency devaluation risks given the strong reported external position figures," Saada stated. She noted that the facilitation cycle does not represent a risk of capital exit or devaluation given the strong external financial position figures, with the current account deficit being reduced and fully covered by foreign direct investment in the first half of FY 2017/2018.
