CBE Seized Right Moment to Cut Rates; Another Cut Possible in December: Analyst

14/11/2020

The CBE seized the opportunity to cut interest rates at the right time, when certain economic indicators prompted it to resume a monetary easing cycle, Noaman Khalid, economist and associate director at Arqaam Capital, told Delta Digest.

Khalid said that the CBE made use of the low inflation levels, the high real interest rate and the surge in foreign investments in government debt instruments, as investors were lured by the stability of the Egyptian pound and the country's economic outlook, to slash interest rates over the last two meetings.

"Regardless of whether the coronavirus will be contained in the near future or not, the interest rates must be lowered anyhow, even below the current rates, in order to be attractive for the business community," he said.

Khalid added that the recent cuts in interest rates came to prepare the economy should the central bank decide to suspend its support initiatives, like the EGP 200 billion ($12.8 billion) initiative to aid the industrial sector, which is offered at an 8 percent interest rate.

Khalid said that suspending the central bank's initiatives would be problematic without first trimming the interest rates, as companies participating in these initiatives would be subjected to higher interest rates if they were abruptly suspended; therefore, the central bank had to lower interest rates to make sure that the participating companies stand on a solid ground.

He said that the cuts would not impact the yields offered on government securities, saying that, "normally, yields on government securities are tied to the interest rates set by the CBE, but what happens now is that the central bank cut interest rates while keeping the yields of government securities unchanged … the central bank uses its monetary instruments to ensure that the yields remain unchanged. That is why they were not impacted over the recent period."

While the last 100 bps cuts are sufficient, another 25-50 bps cut might take place at the CBE's upcoming monetary policy meeting in December, Khalid predicted.

The more cuts are carried out, the lower the magnitude of future cuts will be, he said.

Meanwhile, Capital Economics said it expects the CBE to extend its monetary easing policy throughout 2021.

The UK-based economic research agency said in a report on Friday that, with the lack of fiscal support from the government, it becomes the CBE's responsibility to back the economic recovery.

Moreover, with inflation expected to remain weak, Capital Economics expected the overnight deposit rate to be slashed by 100 bps to 7.25 percent by the end of next year.

"There is still plenty of scope for further monetary loosening – real interest rates remain close to 4%, among the highest in the emerging world," it said.

For the remainder of 2020, the research agency expected annual headline inflation to average 4.8 percent.

"Weakness in the key tourism sector is likely to persist and limited fiscal support threatens to leave scars on the economy," it warned.

Capital Economics also suggested that the CBE's last cut could have been triggered by an attempt to push back against the strengthening of the pound, which have appreciated by 3 percent against the US dollar since the beginning of 2020.

"We have warned before that the pound is looking increasingly overvalued and the CBE may well be moving to engineer some currency weakness in order to lift inflation and also improve external competitiveness," the research agency said.