An interest rate cut remains a necessity to support growth momentum and reduce high debt service burden, according to Beltone Financial.
In a research note, Beltone predicted the pause in monetary easing will delay possible domestic investment appetite, leaving economic growth mainly relying on megaprojects’ momentum, which will impact spending levels as well. On the other hand, a rate cut is still necessary to help the government in reducing the high debt service burden, which remains the key challenge, in Beltone’s view.
The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep the overnight deposit, lending rate, and the rate of the main operation unchanged at 15.75%, 16.75%, and 16.25%, respectively. The discount rate was also kept unchanged at 16.25%.
The decision came in line with Beltone’s expectations, supported by the upcoming inflationary impact of subsidies reforms. Inflation declined to a single-digit reading in June, for the first time since March 2016, which will have a substantial impact on inflation readings throughout the second half (H2) of 2019.
“However, the CBE is yet to assess the impact of the recently introduced increases in electricity and fuel prices, which will be apparent in July’s inflation reading. Meanwhile, the CBE cited the current geopolitical risks impact on oil prices, which challenges domestic inflation outlook as another reason for its decision,” Beltone stated.
“We reiterate our view of a 100 basis points (bps) cut in rates in the third quarter (Q3) of 2019. The favourable base effect and the Egyptian pound strength will advocate benign annual inflation readings till year-end.”
Meanwhile, Beltone noted that June’s low reading will provide a cushion for an expected inflationary wave.
It expected an average reading of 9% in H2 of 2019, within the CBE target zone of 9% (±3%) by Q4 of 2020. “We believe the next Fed meeting on 30/31 July 2019 is key for timing of resumed monetary easing. We reiterate our view that chances for a 100bps cut are more likely in September or November 2019. We believe treasury yields will remain attractive, even after mirroring the interest rate cut, underpinned by a strong EGP and rising real interest rates given the inflation deceleration,” Beltone concluded.