Beltone expects CBE to cut interest rates by 2% by end-FY 2017/2018

Institution expects inflation slowdown to reach 12.8%, in line with CBE's target of 13% ±3% by end-2018

The research department of Beltone Financial predicted that the Central Bank of Egypt (CBE) will cut interest rates again, by 2%, at the end of the current fiscal year 2017/2018.
The CBE's Monetary Policy Committee (MPC) decided to cut interest rates by 100 basis points (1%), according to a statement issued by the CBE on Thursday. Each of the overnight deposit rate, the overnight lending rate, and the rate of the CBE main operation was reduced by 100 basis points to 16.75%, 17.75%, and 17.25% respectively. The discount rate was also reduced by 100 basis points to 17.25%.
According to Beltone, the cut offsets the increase that the CBE's MPC approved in July 2017, which was then described as a temporary measure.
"We note that monetary policy in Egypt witnessed a strong rise in interest rates by 700 basis points since the floatation of the pound in November 2017, while the CBE noted that 400 points are temporary," according to Beltone.
It added that the decision to cut interest rates by the CBE matched previous expectations, noting that the decision was supported by containing inflationary pressures, which showed as annual inflation reached 14.4% in February.
Beltone expected the slowdown in inflation to continue to settle at 12.8% in March, in line with CBE's target of 13% ±3% at the end of 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.
It also expected oil prices to rise by between 35% and 45%, adding 3-5% to inflation.
According to Beltone, the CBE is also expected to keep the variable-yielding deposit auctions that were first floated after the pound's flotation, as one example of monetary policy tools to deal with rising interest rates, with the pace and size of these auctions falling in the second half of 2017/2018 and increasing in the first half of FY 2018/2019.
"We do not expect the yield levels to reflect full interest rate cuts as demand for fixed income instruments continues, as Egypt continues to provide an attractive opportunity to invest in fixed income instruments, particularly among African markets, with a devaluation that naturally provides an opportunity for gains from local currency, as well as the risk of repatriating profits from abroad ease," it added.
Beltone noted that macroeconomic visibility is also expected to support natural flows of foreign investments in fixed-income instruments.
According to Beltone, it is likely to raise the credit rating of Egypt in 2018.