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Securities & Investment

Tag: interest rates in Egypt

HC expects the MPC to maintain the policy rates on its first meeting in 2024

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 1st. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “We expect the MPC to maintain the overnight deposit and lending rates on its 1 February meeting in the lack of an FX rate movement; however, if an EGP devaluation takes place, we don’t rule out a policy rate hike. We anticipate an adjustment in the FX rate after concluding the IMF’s delayed first and second reviews and reaching an agreement with the IMF on doubling, if not more, the value of the USD3.00bn Extended Fund Facility (EFF). Regarding inflation, we forecast January’s annual headline inflation to increase by 6.7% m-o-m and 36.3% y-o-y to factor in higher metro ticket prices, telecom prices, household electricity prices, and also due to increased money supply resulting from the maturity of high-yielding certificates of deposits (CDs) in January, which the government tried to absorb by issuing one-year CDs by Banque Misr and the National Bank of Egypt (NBE) at an interest rate of 23.5% paid monthly and 27.0% paid annually. Also, the Commercial International Bank Egypt – CIB (COMI EY) issued competitive high-yielding three-year CDs at interest rates ranging from 20-22%. Pressures on the currency are increasing, with Egypt’s 1-year CDS increasing to 960 bps from 886 bps on 21 December, gold price skyrocketing by c17% y-t-d, and market participants pushing for higher yields on treasuries. The 12M T-bills rate increased to a 52-week high of 27.7% last Thursday from 27.4% on 21 December, implying a current negative real interest rate of 9.0%. Despite the negative real interest rate on treasuries, we don’t expect attracting carry trade to be at the forefront of the MPC priorities for the time being due to the FX uncertainty, the rating downgrades by Moody’s, S&P, and Fitch, and Egypt’s removal from JP Morgan’s Global Bond Index-Emerging Markets (GBI-EM) series, effective 31 January due to significant FX conversion concerns reported by investors, making Egyptian treasuries less attractive to foreign investors for the time being. On a more positive note, the banking sector’s net foreign liabilities (NFL) narrowed by USD170m m-o-m in November to USD27.0bn and, excluding the CBE, by USD47.2m m-o-m to USD15.8bn, net international reserves (NIR) increased by around USD47m m-o-m to USD35.219bn in December from USD35.173bn a month earlier, and deposits not included in official reserves also increased c3.2% m-o-m in December to USD6.38bn, according to CBE data.”

It is worth mentioning that, in December meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending at 19.25% and 20.25%, respectively, after maintaining it for three consecutive meetings and increasing it by 300 bps in 2023 and 800 bps in 2022. Egypt’s annual headline inflation decelerated to 33.7% in December from 34.6% y-o-y in November, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.4% m-o-m in December compared to a 1.3% m-o-m increase in the previous month. On the global front, the US Federal Reserve raised interest rates in July 2023 by 25 bps to a range of 5.25-5.50%, a total of 100 bps in 2023 and 425 bps in 2022, with most expectations likely to maintain rates in its meeting in 30-31 January.

 

HC believes the MPC is to keep the policy rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 21st. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

Financials analyst and economist at HC, Heba Monir commented: “ We anticipate Egypt’s inflation to continue rising by 1.8% m-o-m and accelerate to 37.8% y-o-y in September, reflecting supply shortages of basic commodities and products mainly caused by the curbing of importation and lack of USD availability and the seasonality effect of the partial start of schools and universities’ academic year. Egypt’s overall balance of payment (BoP) recorded a deficit of USD317m in 3Q22/23, despite recording surpluses during the previous two quarters, mainly due to a c17% q-o-q drop in exports. Moreover, Egypt’s 1-year CDS soared c60% y-t-d and c31% m-o-m to 1,217 bps in mid-September 2023. On a more positive note, net international reserves (NIR) increased by 4.39% y-o-y and 0.14% m-o-m to USD34.9bn in August, and deposits not included in the official reserves increased by c1.6% m-o-m and 5.35x y-o-y to USD4.74bn in August. Egypt’s banking sector’s net foreign liabilities (NFL) narrowed by USD822m m-o-m to USD26.3bn in July, according to CBE data. Excluding the CBE, the banking sector’s NFL narrowed by USD965m m-o-m to USD16.1bn, due to an increase in banks’ foreign assets (excluding the CBE) by c8% m-o-m versus no change in banks’ foreign liabilities. Based on Egypt’s economic situation, we believe that the MPC is likely to maintain interest rates at its 21 September meeting to fully absorb the effect of the last 100 bps increase, especially that the inflation is supply-driven and not demand-driven. Additionally, the latest 12-month T-bills recorded an average yield of 25.541%, up 663 bps y-t-d and 83 bps m-o-m, partially reflecting the 3 August 100 bps rate hike, the spike in Egypt’s CDS and to maintain the attractiveness of Egypt’s carry trade, which also suggests that the MPC may hold interest rates at its upcoming meeting.”

It is worth mentioning that, in its 3 August meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 100 bps to 19.25% and 20.25%, respectively, with 300 bps total rate hike y-t-d and 800 bps in 2022. Egypt’s annual headline inflation accelerated for the third consecutive month to a record of 37.4% in August from its previous record of 36.4% y-o-y in July, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.59% m-o-m in August compared to 1.86%m-o-m in the previous month. On the global front, the US Federal Reserve raised interest rates in July by 25 bps to a range of 5.25-5.50%, a total of 100 bps y-t-d and 425 bps in 2022, with an expectation to maintain rates in its meeting next week, according to Reuters poll.

HC believes that a 100bps hike is possible

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled May 18th. Based on Egypt’s current situation, they expect the CBE to increase the policy rates 100bps.

 Financials analyst and economist at HC, Heba Monir commented: “ Our comment: We see the recent deceleration in inflation rate to be short-lived and expect inflation to inch up 1% m-o-m in May following the recent increase in diesel prices and changes in the ration cards system, averaging at 30.2% for 2H23, on our numbers. Also, the banking sector’s net foreign liabilities (NFL), including the CBE, widened to USD24.5bn in March from USD23.0bn in February, according to CBE data. Excluding the CBE, the banking sector’s NFL widened significantly to USD15.6bn in March from USD13.8bn in February. As a result of the pressure on the local currency, Egypt’s 1-year CDS reached a record high. On a more positive note, the current account registered a surplus of USD1.41bn in 2Q22/23 for the first time in many years compared to a deficit of USD3.80bn a year earlier, mainly due to significant import control. On the other side, the capital and financial account recorded a deficit of USD1.63bn in 2Q22/23, reversing a surplus of USD5.38bn a year earlier, mainly due to a USD3.96bn deficit in the assets of the banking and other sectors compared to a surplus of USD2.38bn a year earlier and net foreign portfolio outflows reached USD855bn in 2Q22/23 bringing these outflows to USD3.01bn in 1H22/23. The external debt increased by c5% q-o-q and c12% y-o-y to USD163bn in December 2022.  A 100 bps policy rate hike in the coming meeting could increase the required 12M T-bills rate to 27.5%, based on our calculations, due to a significant hike in Egypt’s 1-Year CDS to 2,510 bps from only 618 at the beginning of the year and a widening in the inflation differential between Egypt and US to 29.1% in 2Q23 from 24.2% in 1Q23, which would translate into a real interest rate of 6.57% based on our calculation (accounting for a 15% tax rate for US and European investors and 16.5% inflation in May 2024) compared to 3.63% currently and 0.50% in the US. We believe this could attract carry trade again, especially with the Federal Reserve hinting that are no more hikes expected soon. So, considering our inflation expectations until year-end, the need to attract carry trade, the banking sector’s widening NFL, and the delay in the partial asset sale program, we expect the MPC to raise the policy rates by 100 bps. The downside of a rate hike is higher debt servicing costs; however, we see bridging the FX shortage through carry trade as a more urgent priority.”

It is worth mentioning that, in its 30 March meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 200 bps to 18.25% and 19.25%, respectively, with a total of 200 bps y-t-d and 800 bps in 2022. Egypt’s annual headline inflation decelerated to 30.6% y-o-y in April from 32.7% y-o-y in the previous month, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.7% m-o-m in April compared to an increase of 2.7% m-o-m in the previous month. On the global front, the US Federal Reserve raised interest rates by 25 bps on 4 May to a range of 5.00-5.25% with a total of 75 bps y-t-d and 425 bps in 2022. Based on Egypt’s current economic situation, we provide below our expectations for the likely outcome of the 18 May MPC meeting.

HC expects the CBE to keep interest rates unchanged in the upcoming MPC meeting

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 16th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “Egypt’s inflation remains closer to the lower end of the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.6% in 4Q21. We believe that the Federal Reserve’s recent announcement of unlikely interest rate hikes in the near future partly relieved the pressure on Egypt’s treasury yields by renewing the interest in emerging markets carry trade. Accordingly, Egyptian treasury bill yields declined by an average of 40 bps since mid-August, reflecting higher foreign portfolio inflows during August. Foreign holding of Egyptian treasuries increased to USD33.0bn in August from USD29.0bn in May, according to S&P Global Ratings. We also believe that a rebound in foreign currency receipts from tourism following the resumption of Russian flights to Egypt’s Red Sea resorts released some interest rate pressure on the EGP. Going forward, we believe that the interest rate action of other emerging markets will determine the pace of future declines in Egypt’s treasury yields. Currently, Turkey offers c19% on its 1-year treasuries (hence a real yield of 5.45% given zero taxes and Bloomberg 2022 inflation estimate of 13.4%) compared to Egypt’s real yield of 3.0% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). Also. according to CBE data, the corporate borrowing rate is currently at around 9.4%, while the risk-free after-tax rate is around 10.4%. Therefore, we believe that any interest rate cuts at the moment could lead to a wider gap between the corporate and the risk-free rates, with the corporate rate being on the lower end. We accordingly expect the MPC to keep rates unchanged in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 5 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the sixth consecutive time. Egypt’s annual headline inflation came in at 5.7% in August, with monthly inflation increasing 0.1% m-o-m compared to an increase of 0.9% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

-Ends-

About HC Securities:

HC Securities & Investment (HC) is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody, online trading and private equity through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.2bn. HC Asset Management, winner of the 2018 MENA Fund Manager Awards, now manages 9 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP6.8bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.

 

HC: Possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE and the JP Morgan GBI-EM

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 17th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “The May inflation figures came in slightly better than our estimates of 5.0% y-o-y and 0.8% m-o-m. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.8% y-o-y accounting for rising international commodity prices and a possible pick-up in tourism and consumer spending following the successful rollout of the COVID-19 vaccine. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. Given sluggish tourism receipts, currently, Egypt relies on foreign portfolio inflows into sovereign debt as a main source for foreign currency which poses interest rate pressures on sovereigns. This is evident in T-bill rates declining by only 129bps since January 2020 despite the CBE undertaking a 400 bps rate cut during that period which resulted in a decoupling between corridor rates and sovereign yields. Currently, banks earn an after-tax rate of 10.6% on 12M treasuries and around 10.8% on lending to the private sector (according to the CBE’s subsidized loan initiatives to different sectors at 8% while compensating participating banks for the difference between mid-corridor rate + 2%). We believe that at this point a rate cut could result in further deviation of sovereign and corridor rates with the risk-free rate being on the lower side. We note that over the last 3 months foreign portfolio inflows into Egyptian treasuries have been largely stagnant with announcements for foreign holdings in May being at USD28-29bn, the same figure that was announced for February. We also note that net foreign assets for the banking sector (excluding the CBE) came in at USD3.52bn which we believe is a vulnerable level given that Egyptian banks are the main cushion against a currency sell-off. We accordingly, expect the MPC to maintain rates unchanged in its upcoming meeting. We believe that a 100 bps rate cut is possible in 2H21 following the resumption in tourism and a possible pick-up in international trade. Also, possible higher inflows into Egyptian sovereigns following the inclusion in the FTSE Frontier Emerging Markets Government Bond Index Series and the JP Morgan GBI-EM Global Diversified Index could allow room for the MPC to undertake a rate cut.  That said, we believe that Egyptian treasuries provide attractive real yield of 4.0% on our calculations (13.3% on 12M T-bills, 15% tax rate for European and American investors and our inflation estimate of 7.3%) compared to a real yield of 3.1% for Turkey (18.7% on 1-year treasuries, zero tax rate and Bloomberg inflation estimate of 15.6%).”

It is worth mentioning that, in its last meeting on 28 April, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth consecutive time after undertaking cuts of 50 bps twice in its October and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.8% in May, with monthly inflation increasing 0.7% m-o-m compared to an increase of 0.9% in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Egypt currently relies on foreign portfolio inflows as a main source for foreign currency, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla
  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 18th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “February inflation figures came in lower than our estimates of 4.9% y-o-y and 0.5% m-o-m, which we believe reflects suppressed consumer demand currently. Over the rest of 2021, we expect monthly inflation to average 0.8% m-o-m and 6.4% y-o-y accounting for possible domestic price shocks following the recent commodity price rally and possible recovery in consumer confidence following the successful rollout of the COVID-19 vaccine. Our numbers rule out domestic gasoline price increases since the current market price reflects a Brent price of USD61/barrel (as estimated in the FY20/21 government budget). We estimate FY20/21e average Brent price at USD54/barrel, as it averaged USD44/barrel in 1H20/21 while Bloomberg consensus estimates for 2H20/21 come at USD62/barrel. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. On the external position front, however, we believe that Egypt currently relies on foreign portfolio inflows as a main source for foreign currency given slashed tourism revenue and low exportation activity. Hence, with treasury yield hikes in the USA as well as different emerging markets such as Turkey, we believe that the CBE has limited room to undertake further interest rate cuts in its upcoming meeting. We believe that global interest rate hikes reflected in a decline in average monthly portfolio inflows in Egyptian treasuries to USD1.25bn during January and February from USD2.29bn in 2H20. We, accordingly, expect the MPC to keep rates unchanged in its upcoming meeting. That said, we note that Egyptian 12M treasuries currently offer a real yield of 5.1% (given a nominal yield of 13.3%, 15% tax rate on treasuries’ income for American and European investors and our 2021e average inflation forecast of c6%) which is higher than Turkey’s real yield of 2.0% (given nominal yield of 15.7% on 14M treasuries, zero tax rate, and Bloomberg 2021 inflation forecast of 13.7%).”

It is worth mentioning that, in its last meeting on 4 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the second consecutive time after undertaking cuts of 50 bps twice in its September and November 2020 meetings. Egypt’s annual headline inflation accelerated to 4.5% in February from 4.3% in the previous month, with monthly inflation increasing 0.2% m-o-m reversing a decline of 0.4% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC Perceives upward interest rate pressures, CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 4th and based on Egypt’s current situation, they Perceive upward interest rate pressures and expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We expect January inflation to come in at 5.2%, near the lower end of the CBE’s new target range of 7% (+/-2%) for 4Q22. We, however, perceive upward interest rate pressures as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions. In this regard, we note that Egyptian treasuries are now facing higher competition from Turkey which increased its policy rates by 200 bps on 24 December, taking its 15M treasuries to 15.97% up from an implied rate of 10.66% previously. Given Bloomberg estimates for 2021 inflation in Turkey at 12.2%, the Turkish treasuries now offer 3.8% real return similar to Egypt’s real return of 3.8% (given Egypt’s 12M yields at 12.99%, 15% tax rate for American and European investors and our 2021e inflation forecast of 7.2%). On a different front, banking sector liquidity, as indicated by the CBE’s deposit auctions, declined to represent c11% of total local currency deposits in November from c13% in October. We also believe that currently, the high-risk business environment poses upward interest rate pressures. Even though the Egyptian economy has shown high resilience in absorbing the repercussions of the pandemic, global uncertainty had its toll on different sectors in Egypt especially tourism and export-related sectors increasing their risk and also posing interest rate pressures, in our view. That said, we expect the MPC to keep rates unchanged in its upcoming meeting on 4 February.”

 

It is worth mentioning that, in its last meeting on 24 December, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged after undertaking cuts of 50 bps twice in its September and November meetings. Egypt’s annual headline inflation decelerated to 5.4% in December from 5.7% in the previous month, with monthly inflation decreasing 0.4% m-o-m compared to an increase of 0.8% m-o-m in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Consumer spending positively affected by the declining unemployment, HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 24th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We believe December inflation figures could accelerate further to 6.1% y-o-y and 0.2% m-o-m possibly correcting for November price increases resulting from supply shocks of some vegetables. However, inflation would still remain within the CBE’s target of 9% (+/- 3%) for 4Q20. We believe that declining unemployment levels to 7.3% in 3Q20 from 9.6% in the previous quarter has reflected positively on consumer spending recently. We also believe that the relative improvement in investor confidence together with monetary easing started to bear fruit as indicated by Egypt’s Purchasing Manager Index (PMI) exceeding the 50 benchmark in September, October and November, coming in at 50.4, 51.4 and 50.9, respectively. Given our December inflation forecast, real interest rate on short-term deposits and loans is estimated at c2% and c4%, respectively, significantly higher than their historical 12-year average of c-3% and c1%. On a different front, we expect foreign inflows into Egyptian treasuries to slow down over the coming months due to possible diversion of funds towards recovering emerging markets’ stocks this is beside possible outflows due to profit taking in December. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.03% (based on 1-year T-bill rate of 13.0%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a relatively better risk profile with its 5-year foreign currency CDS at 353 currently, compared to 378 for Turkey. That said, we believe the CBE has room for another 100 bps rate cut that we expect to take place in 1Q21, while we expect it to hold rates unchanged in its upcoming December meeting, since we expect markets to show muted response to an interest rate change during the holiday season.”

It is worth mentioning that, in its last meeting on 12 November, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps for the second consecutive month after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month, with monthly inflation increasing 0.8% compared to an increase of 1.8% m-o-m, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC expects the CBE to cut interest rates 50bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 12th and based on Egypt’s current situation, they expect the CBE to cut interest rates 50bps.

Head of macro and financials at HC, Monette Doss commented: “We believe October inflation figures could accelerate further to 4.2% y-o-y and 1.5% m-o-m mainly impacted by the back-to-school season, however, it would still remain well below the CBE’s target of 9% (+/- 3%) for 4Q20. We believe high unemployment levels and suppressed consumer spending are the main factors underlying low inflation levels, while monetary easing started to bear fruit in October as indicated by Egypt’s Purchasing Manager Index (PMI) coming in at 51.4 signaling economic expansion for the second consecutive month. Based on our October inflation forecast, we estimate Egypt’s real interest rates on short-term deposits and loans at 4.4% and 5.9%, respectively, significantly above their 12-year average of -3.3% and 0.8%. Also, foreign portfolio investments in Egyptian treasuries recovered sooner than we expected reaching USD21.1bn in mid-October from USD10.4bn in May, according to official announcements, resulting in the Egyptian banking sector increasing its net foreign assets position to USD2.06bn in September, excluding the CBE, reversing a net foreign liability position of USD1.09bn in August. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.56% (based on 1-year T-bill rate of 13.6%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a better risk profile with its 5-year foreign currency CDS at 408 currently, compared to 528 for Turkey. That said, we expect the CBE to cut interest rates 50bps in its upcoming meeting in order to stimulate private investment and consumption and drive GDP growth, especially in light of a potential second COVID-19 wave. We expect this to have almost no effect on foreign portfolio inflows in Egyptian treasuries, with its yields declining by only 100 bps since March, despite a total of 350 bps rate cuts by the CBE over the same period of time.”

It is worth mentioning that, in its last meeting on 24 September, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 3.7% in September from 3.4% in the previous month, with monthly inflation increasing 0.3% reversing a decline of 0.2% in August, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC comments on the MPC’s 50 bps interest rates cut

Posted on by Marwa Nakhla

  • The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided to cut the benchmark overnight deposit and lending rates by 50 bps to 8.75% and 9.75%, respectively, at its meeting on Thursday, according to a press release. The CBE has also cut the rate of its main operation and the discount rate to 9.25%, it announced.

HC’s comment

The MPC’s decision came in against our, as well as consensus, expectation of keeping rates unchanged. We believe the MPC’s decision, together with the recent announcements by commercial banks to reduce interest rates on their CDs by 2.0%–3.5%, and canceling the 1-year 15% CDs aims at encouraging consumer spending as a significant driver for GDP growth. This also coincides with the government’s efforts to promote the role of the private sector as the main player in the economy, building on pre-COVID-19 growth trends where private consumption grew by 5.3% y-o-y in 1Q20, the highest rate since FY12/13 where it averaged 2.9% over FY12/13–FY18/19. Also, private investments grew at c14% y-o-y in 9M19/20 (in real terms) outpacing government investment which declined by c5% y-o-y. Having said that, we however believe that the decline in policy rates could have a limited short-term effect on consumption, as already much liquidity is allocated to the 1-year 15% CDs together with high unemployment rates. Moreover, we believe the rate cut will not necessarily correspond to a similar decline in T-bill rates. Yields on 12-month T-bills declined by only 100 bps since March despite the previous 300 bps rate cut undertaken by the CBE.