With inflation in Egypt taking a downward trend, the Central Bank of Egypt (CBE) was encouraged to cut interest rates three times in 2019, with an overall reduction of 4.5 per cent over the course of the year. Inflation rates fell over 2019 to as low as 3.6 per cent in November after roaming around in double figures in 2018 and hitting an all-time high of 33 per cent in July 2017. The CBE's overnight deposit and lending rates currently stand at 12.25 per cent and 13.25 per cent, respectively. December inflation rates released earlier this week came in at almost double those of November to reach 7.1 per cent, however. But analysts cited a base effect: inflation in December 2018 had been lower than over the previous four months, and thus the annual inflation rate for December 2019, when compared to the corresponding 2018 figure, came in as higher than the previous months. There had not been a tangible jump in prices that had been the cause of the increase. The question now is how the inflation rates will be reflected in the CBE's decision on interest rates. Will it stick to its easing policy by lowering rates and making credit cheaper to the private sector, or will it opt to hold on in order to watch developments in the inflation rates? Despite the recent spike, inflation remains below the mid-point of the CBE's target range of nine plus or minus three per cent for the end of 2020. Moreover, it is expected to remain within the target range for some time. “The relatively lower inflation rates recorded in January 2019 through May 2019 compared to the corresponding period of 2018 could be translated into higher inflation rates over the coming months than the record-low levels seen from June 2019 to November 2019. Hence, inflation is forecast to record 6.5 per cent in January 2020, then fluctuate within 4.5 to 6.5 per cent during the first quarter of 2020,” according to Pharos Securities, an investment firm. While Pharos Securities said that the slowdown in inflation together with the appreciation of the pound against the dollar would continue to be counterbalanced by monetary easing transmitted via interest rate and credit channels, the CBE's decision to cut its rates by only one per cent meant the era of “mega rate cuts” was “drawing to a close.” It said that from June to December 2019, urban headline inflation had fallen on a month-to-month basis in four of the seven months. The interest differential between deposits in dollars and pounds had contributed to the 20 per cent increase in the value of the pound versus the dollar, it said. The CBE has recently taken decisions that can be read as biased towards an easing policy. They include making LE100 billion available via the commercial banks in low-rate financing to support the expansion plans of medium-scale industrial enterprises. The decision to increase the ceiling of loan instalments from 35 to 50 per cent of monthly income is also in line with the bank's bias to easing monetary conditions and encouraging private spending. Moreover, the National Bank of Egypt and Banque Misr, the largest state-owned commercial banks, have slashed their three-year certificates of deposit rates by one per cent to 12 per cent. “The three sequential moves mirror growing concern over the persistent contraction in private-sector activity since last summer,” Pharos Securities noted. December 2019 marked the fifth consecutive month of contraction in private-sector activity, as gauged by the non-oil private-sector Purchasing Managers Index. “We think that the CBE will continue with its easing cycle and cut its overnight deposit rate by 0.5 per cent from 12.25 per cent to 11.75 per cent. Further ahead, we expect an additional 1.75 per cent of cuts by the end of 2021, taking the rate to 9.5 per cent,” it concluded. Beltone, a leading investment bank, expects the CBE to keep interest rates unchanged. “Containing inflationary pressures, as domestic fuel prices did not change in the second quarterly review, would support a low monthly inflation reading. We therefore expect the Central Bank to keep interest rates unchanged to test liquidity levels after the bold interest rate cuts taken in 2019 and to absorb the impact of cash outflows triggered by the decline in yields on treasuries,” it said.
*A version of this article appears in print in the 16 January, 2020 edition of Al-Ahram Weekly.
