Pundits expect CBE to hold interest rates unchanged on Thursday

April's inflation slowdown is temporary, may pick up again by end-May: analysts, investment banks

The monetary policy committee (MPC) of the Central Bank of Egypt (CBE) will hold its third regular meeting this year to discuss the fate of interest rates, which is the most prominent indicator of the direction of interest rates on the Egyptian pound in the local market.
The committee's meeting this time comes amid strong expectations that it will be stabilised at the same levels reached on 14 February, despite the decline in the rate of headline and core inflation at the end of April.
At its 14 February meeting, the committee decided to reduce the basic interest rates by 1% to 15.75% for deposits, 16.75% for lending, and 16.25% for credit, discount, and main operation.
On 28 March, the CBE disagreed with market expectations and decided to fix those prices at this level, despite expectations of a reduction.
The CBE reported drop in core inflation to 8.1% year-over-year (y-o-y) in April from 8.9% in March.
The monthly core inflation rate was 0.4% in April from 0.5% in March.
The Central Agency for Public Mobilization and Statistics (CAPMAS) said that the annual inflation of consumer prices index (CPI) in cities fell to 13% y-o-y in April, compared with 14.2% in March.
The CPI scored 308.1 points for April 2019, registering a rise of 0.4%, compared to March 2019.
Mohamed Abdel Aal, a member of the board of directors of the Suez Canal Bank and a banking expert, said that the changes in the international and domestic markets support the CBE's trend to stabilise its interest rates, and weakens the trend to reduce them. He expected the CBE to cut interest rates in the fourth quarter (Q4) of 2019.
Abdel Aal added that despite the decline in inflation during the month of April, yet removing subsidies and freeing the price of gasoline-scheduled for implementation starting next July-will lead to increased inflation again.
He pointed out that the exchange rate of the pound is stable and significantly improving, which may push the CBE to stabilise interest rates, so as not to pressure the local currency by raising or lowering interest rates, adding that the interest rate must be attractive to foreign investors in government debt instruments.
According to Abdel Aal, the CBE may also want to maintain the remarkable return on household savings to compensate for high inflation rates, and avoid possible inflationary pressures, especially as the country moves to liberalise energy prices in accordance with the agreed timetable with the International Monetary Fund in the second half of this year, in addition to rising global oil prices.
Furthermore, Abdel Aal pointed to the existence of external factors which could affect the monetary policy of Egypt, including the escalating trade war between the United States and China, which may push inflation to rise in the US, which may force the Federal Reserve to raise the interest rate on the dollar, which may be then force the CBE to raise the interest rate.
Tarek Metwally, a banking expert who predicted interest rates to remain unchanged on Thursday, also agreed, noting that the probability of keeping rates unchanged is greater than a cut in rates as the government moves to lift subsidies on fuel in June.
Tarek Metwally, a banking expert
A report by the research department of HC Securities said that the MPC of the CBE will set the interest rate at its meeting scheduled for Thursday.
The research also expected the CBE to keep interest rates unchanged at its next three meetings, so that the market absorbs the first and second impact cycles to increase fuel prices.
“While monthly inflation was exceptionally low in April, it is expected to rise in May due to increased consumer demand during Ramadan,” Sara Saada, macroeconomic analyst at the company's research department, said.
However, HC expects the CBE to resume its interest rate cuts by the end of Q3 or in Q4 of 2019 as prices stabilise but the reduction decision remains subject to the market's position at the time.
In a research note issued by Pharos Holdings, it expected the pound interest to be stabilised at Thursday's meeting, but also expected 100 basis points (bps) rate cut to 200 bps in Q4 of this year.
It pointed out that the monthly inflation figures were less than expected, pointing out that the discounts on food items by the government contributed to curbing inflation.
Chief economist at HC Securities and Investment Sara Saada
Pharos expected the annual inflation rate to rise again in the coming months due to the removal of fuel subsidies and for the headline inflation to increase by 3% in June and September, in conjunction with the beginning of the school year, which tends to come with 1% inflation increase.
On an annualized basis, Pharos sees inflation as between 12.5% and 13.5%.
The investment bank Shuaa also predicted that the CBE will keep interest rates unchanged until the end of the year, with Ramadan and Eid, followed by fiscal controls, expected to continue inflationary pressures.
In contrast, investment bank Beltone said there was a chance to cut the pound's interest rate further by 100 bps at the MPC meeting on Thursday.
“In our view, the recent cut in interest rates ahead of February's forecast, aimed to boost investor confidence, by sending a strong confidence message in the current monetary policy, as well as confidence in the local currency course.”
However, the most likely scenario is to cut interest rates by 100 bps by the end of the year, amid the repercussions of inflationary pressure as the automated fuel pricing mechanism is applied.
Fitch Ratings had forecast that the CBE would cut interest rates again by 100 bps during the rest of 2019.
The agency said in a report that the risks of further easing monetary policy maintains substantial risks.