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Winners and losers of CBE's interest rate cut
Government, investors, and EGX are the most beneficiaries from the decision, while bank depositors are the most harmed
Published in Daily News Egypt on 17 - 11 - 2019

The local market is anticipating the impacts of the Central Bank of Egypt's (CBE) last Thursday interest rate cut decision on various sectors.
While the government, investors, and the Egyptian Exchange are the most beneficiaries from the decision, bank depositors are the most harmed, as banks will also cut interest rates on their savings vessels. Banks operating in the Egyptian market on Sunday will hold intensive meetings to discuss the fate of interest rates on their savings vessels, retail products, and loans, after the CBE's decision.
The CBE decided during its Monetary Policy Committee's (MPC) meeting on 14 November to cut its basic interest rates by 1% to reach 12.25% for overnight deposit, 13.25% for overnight lending, and 12.75% for main operation rate.
This was the fourth rate cut in 2019, as the first cut was in February by 100 basis points, and the CBE kept the interest rates unchanged for three consecutive MPC meetings over five months. In August, the MPC meeting resulted in a 150-basis-point cut, followed by another slash of 100 basis points in September.
Collectively, the CBE's interest rates have seen nine movements since the exchange rate liberalisation on 3 November 2016.
The CBE raised its interest rates by 7% over three meetings in 2016 and 2017, before cutting them by 6.5% over six meetings in 2018 and 2019.
The CBE's last decision was highly expected by analysts, investment banks, and local and international institutions, in light of the marked decline of the inflation rate below the CBE's target level, along with the rise of the Egyptian pound price against the US dollar, and the Federal Reserve's frequent cuts of its interest rates.
The MPC said in its interpretation of the recent rate cut that the continued decline in the annual rate of inflation recording 4.8% in September and 3.1% in October 2019, the lowest rate since December 2005, reinforced the CBE's decision to reduce its interest rates.
It added that this decline in inflation was driven by lower annual food inflation, supported by favourable base effects stemming from the transitory shock to prices of fresh vegetables in the previous year.
The committee also pointed out that the annual inflation rate of non-food commodities increased in October 2019 due to the relatively high prices of services, which contributed to slightly rising annual core inflation rate to 2.7% in October from 2.6% in September 2019, the lowest since April 2006.
The MPC pointed out that the preliminary data indicates the stability of the real GDP growth rate to 5.6% during the third quarter (3Q) of 2019, after recording 5.6% during the fiscal year (FY) 2018/19, the highest rate since FY 2007/08, noting that the contribution of private sector increased in 2Q19, for the first time since 2Q17.
The real private demand growth has been picking up to support the stability of real aggregate demand growth.
Moreover, employment rose, contributing favourably to the continued decline of the unemployment rate to 7.5% in 2Q19, thereby narrowing by almost 6 percentage points from its peak in 3Q13.
Globally, the expansion of economic activity continued to weaken, financial conditions eased, and uncertainty regarding trade policies continued to weigh on the outlook. Meanwhile, international oil prices remain subject to volatility due to potential supply-side factors that include geopolitical risks.
Incoming data continued to confirm the moderation of underlying inflationary pressures, notwithstanding the expected impact of unfavourable base effects on near-term inflation rates due to the reversal of the transitory shock to prices of fresh vegetables in the previous year. Accordingly, the MPC decided to cut key policy rates by 100 basis points.
The reduction of policy rates in the 14 Nov. and previous meetings of the MPC provide appropriate support to economic activity, while remaining consistent with achieving the inflation target of 9% (±3 percentage points) in 4Q20 and price stability over the medium-term.
The MPC asserted that it closely monitors all economic developments and will not hesitate to adjust its stance to preserve monetary stability.
Immediately after the CBE decision, interest rates of about 29 certificates issued by 23 banks were affected. The interest rates on these certificates dropped automatically, as their pricing is linked to the CBE's interest rates.
Banque Misr decided to cut interest rate on its three-year fixed rate savings certificate by 1% to 13%.
The bank also cut interest on certificates based on the interest rate corridor – rate between overnight lending rate and overnight deposit rate – by 1% to 12%.
In a similar move, the National Bank of Egypt (NBE) decided to reduce the interest rate on the bank's platinum certificates by 1% to 13% for the monthly return and 13.25% for the quarterly return.
The Bank has also decided to reduce the return on platinum certificates with variable return by 1%. A decision is to be made regarding the rest of the saving vessels in the bank over the upcoming period.
At the National Investment Bank, it was decided to reduce the interest rate by 2% on the three-year investment certificate “B” to 12% instead of 14%.
To illustrate, Mohamed Abdel Aal, board member of the Suez Canal Bank, said that the CBE's decision to cut interest rates was expected in light of the improvement in the Egyptian economy indicators and the market's need for further cuts in interest rates to trigger borrowing in banks.
Abdel Aal explained that despite the improvement of the indicators of the Egyptian economy, the rate or value of bank lending for financing investment activities is still weak.
He pointed out that despite the availability of deposits in banks amounting to about EGP 4tn, the loans did not exceed EGP 1.8tn, which means that the ratio of lending to deposits is less than 50%, which is not ambitious, and does not achieve the economic growth target of 6%. Consequently, most investors are hoping to cut rates to a level that actually motivates them to borrow.
At the same time, according to Abdel Aal, there are no concerns for foreign direct investment and foreign investments in government debt instruments, because there is still a difference in interest in favour of the Egyptian pound against other foreign currencies, and there are no risks for the household sector due to the interest rate cuts.
Haitham Abdel Fattah, head of Treasury and Capital Markets Sector at the Industrial Development Bank (IDB), said that the CBE's continued interest rate cut is an explicit signal that it has shifted from targeting inflation decline to targeting growth increase, especially after its success in achieving its target level of inflation.
Abdel Fattah expected that the decision to cut interest rates would have a big positive impact on the Egyptian Exchange this week.
With regard to the bank's position on the decision, Abdel Fattah said that the bank will hold a meeting this week to discuss the implications of the decision on interest rates, pointing out that the response of each bank to the CBE's decision depends on its own circumstances and liquidity.
Radwa al-Swaifi, head of research at Pharos Holding, said the CBE's rate cut of 100 basis points was in line with expectations, due to a significant slowdown in inflation since the beginning of the year.
She ruled out that foreign investments in the domestic debt instrument would be affected by the rate cut, due to the real increase in real yields so far, especially after the monetary easing carried out by the Federal Reserve last week and in light of the growing price of the Egyptian pound against the US dollar.
She stressed that the reduction of interest supports two main objectives, namely the rise of private investment, which is essential for sustainable growth rates, especially in light of the Ministry of Finance's target growth of 6.4% in FY 2020/21, as well as reducing debt service, which leads to narrowing the fiscal deficit.
Meanwhile, the banking market is awaiting the issuance of the Sunday treasury bills, the first after the recent rate cut, to find out the direction of interest rates on government debt instruments and the impact of the CBE's decision.
The Ministry of Finance issues five bids for debt instruments weekly, including treasury bills, on Sunday and Thursday, then a bonds bid on Monday of each week.
Similarly, Beltone Financial said that the decision came in line with their expectation, supported by the low single-digit inflation witnessed in October 2019 of 3.1%. We believe the favorable base effect and EGP strength will continue to advocate benign annual inflation readings throughout FY19/20e, keeping inflation rates within the CBE's target zone of 9% (±3%) by the end of 2020, barring any unexpected price shocks.
They explained that the EGP will remain at around EGP16 per US Dollar. Although the rate cut should improve business sentiment, particularly with local investors, we believe an uptick in private demand growth remains key to unlocking CAPEX lending potential.
Beltone believes that despite interest rate cuts, yields on government securities should remain attractive, particularly with the government aiming to make EGP-denominated debt Euroclearable.

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