CBE to review interest rates today in first 2019 meeting

Higher inflation in January shifts market expectations of interest stabilisation in this meeting

Central Bank of Egypt's (CBE) Monetary Policy Committee will hold today its first meeting in 2019 to review the interest rates at the bank, the most important indicator of interest rates direction in the domestic market.
The base interest rate at the CBE is now 16.75% for deposit, 17.75% for lending, and 17.25% for credit, debit, and open transactions.
Despite previous high expectations in the market that the CBE would decrease interest rates in its next meeting, the sudden rise in inflation at the end of January led many experts to project no change instead.
The Central Agency for Public Mobilization and Statistics (CAPMAS) disclosed on Sunday that the annual inflation rate has increased to 12.2% at the end of January, against 11.1% in last December, an increase of 1.1%.
The monthly inflation rate was up by 0.8% at the end of January, versus a decline of 4.1% in December 2018.
According to the CBE, the main consumer price index recorded a monthly average inflation of 0.4% at the end of January up from 0% in December 2018. The annual core inflation also rose by 8.6% in January from 8.3% in December.
A poll conducted by Daily News Egypt at the end of January has revealed strong expectations by analysts of the stability of interest rates until the second half of 2019, then to move down by 2-4%.
Mohamed Abdel Aal, a board member of the Suez Canal Bank and the Arab Sudanese Bank, said that the CBE will implement its same strict monetary policy to maintain the interest rates at the same level in spite of the factors pushing for a decline. “There are several reasons and factors calling on the CBE to continue to maintain a high interest rate within 2019.”
He added that the CBE may maintain high interest rates on pound to counter rising interest rates on the US dollar and to maintain investment flows from foreign investment funds and hedge funds in Egypt's public debt instruments, in addition to keeping a high rate of return on household savings to compensate them for the current high inflation figures.
Abdel Aal added that the annual core inflation rate at the end of January reached 8.6%, which is also another factor to avoid cutting interest rates and to face any possible inflationary pressures due to the lifting of fuel subsidy and the recovery of global oil prices.
According to Abdel Aal, the main factors that could lead the CBE to cut interest rate is the stability of the interest rate on the US dollar, the desire to achieve growth indicators agreed upon with the IMF, and to reduce the cost of public debt.
"We believe that the slight increase in inflation does not threaten the inflation forecast, thus; we affirm our projection of continued accommodation of inflationary pressures in the first half of 2019, as recording a new low inflation level in December 2018 will also keep the rate at 14-15% in 2019,” Beltone said.
In a research note, Beltone said that as the inflation outlook continues to correlate with volatile food prices, it confirms its view of keeping rates at the Monetary Policy Committee meeting on Thursday and throughout the fiscal year (FY) 2018/19.
“We believe that next inflation readings in February and March 2019 will be the key to forecast whether there will be a chance to cut interest rates in the first half of 2019,” it stated.
According to Beltone, other key factors are foreign inflows in fixed income instruments in February 2019 to confirm the renewed appetite of investors on the fixed income market, which stresses limited pressure on the local currency, and the rate of depletion of net foreign assets with banks, which began to decline in December 2018, thus determines the need to support the local currency.
Beltone also affirmed its vision of high yields on treasury bonds regardless of the move of interest rates.
It pointed out that the rise in annual headline inflation in January was due to the increase in prices of food commodities by 12.5%, compared to an increase of 11.2% in December, driven by increased prices of vegetables and cereals in particular.
"At the same time, all other sectors maintained their stability, with the exception of the rise in the medical care sector to 5.1%, against 4.5% in December 2018,” it added.
Beltone pointed out that monthly inflation began to rise once again as it progressed by 0.6% after two consecutive months of decline, despite maintaining to date its historical rates.
On the other hand, HC Securities and Investment (HC) expected another cut in subsidy by July 2019, which may result in renewed inflationary pressures.
The report indicated that those expectations, in addition to the rise in the global interest rate, support the postponement of the resumption of the monetary easing policy to 2020.
HC projected a reduction of interest rate by 500 basis points in 2019, following its previous expectations of further cuts in interest rates in 2019.
The company added that after the expected resumption of the monetary easing policy in 2020, they foresee that private investment will be the main driver of economic growth, and believe that the moderation of inflation, coupled with increased employment, will support improved personal consumption.