Asset-Liability Committees (ALCO) of banks operating in the local market will begin intensive meetings to discuss the fate of interest rates on their savings and retail products and loans, after the Central Bank of Egypt’s (CBE) decision to cut interest rates by 1.5% on Thursday.
Following the CBE’s decision, interest rates on 29 certificates of deposit (CD) issued by 23 banks fell automatically, as their pricing is linked to the basic interest rates at the CBE.
In a bold move in line with market expectations at the same time, the CBE decided on Thursday to cut its basic interest rates by 1.5% to 14.25% for deposit, 15.25% for lending, 14.75% for the credit and discount rate and the rate of the main operation.
CBE’s decision was widely expected by analysts, investment banks and local and international institutions, due to decline in the inflation rates in July, falling below CBE’s target, the strengthening of the Egyptian pound against US dollar, and interest rate cuts by the US Federal Reserve.
According to the press statement issued by CBE’s Monetary Policy Committee, the cuts come as Egypt’s annual headline and core inflation continued to decline to record 8.7% and 5.9% on July 2019, respectively, the lowest rates in almost four years, notwithstanding the recently
implemented fiscal consolidation measures that reached cost recovery for most fuel products.
Furthermore, the statement indicated that this decline was supported by the containment of inflationary pressures, as evident in the
relatively tame monthly inflation figures, and by favourable base effects, as the recently implemented measures were weaker compared to the previous year.
Meanwhile, real GDP growth continued to increase slightly to record a preliminary estimate of 5.7:% in 2019 Q2 and 5.6% in fiscal year 2018/19, the highest in eleven years, while unemployment rate continued to decline to 7.5% in the Q2 2019, representing a decline of nearly 6% compared to its peak of 13.4% during the Q4 2013.
On the other hand, the MPC pointed to the continued slowdown in the growth rate of the global economy and the negative impact of trade tensions on the growth prospects, which contributed to facilitating the global financial situation by reducing the basic interest rates of several central banks.
The statement cited that the global expansion of economic activity continued to weaken, financial conditions eased, and trade tensions continued to weigh on the outlook. International oil prices recently declined.
It stressed that this decision is consistent with achieving the target inflation rate of 9% (± 3%) during the fourth quarter of 2020 and the stability of prices in the medium term.
The committee said it will continue to make its decisions based on future inflation rates, not past inflation rates.
Banking sector review the decision positively
Hisham Okasha, Chairperson of the National Bank of Egypt (NBE), said that the CBE’s decision to cut deposit and lending rates by 1.5% comes after the low inflation rate, and the marked improvement in Egypt’s macroeconomic indicators, and monetary easing policies adopted by international central banks.
He stressed that the decision would support investment and raise demand for loans and credit.
Okasha said that NBE’s ALCO met on an exceptional basis on Thursday evening and decided to cut the interest rates on 3-year platinum CD by 1% to 14% and 14.25% instead of 15% and 15.25%.
The interest rate on variable yield CD was reduced by 1.5% to 14.5% instead of 16%, and the interest rate on the five-year CD was reduced by 1%.
Similarly, Mohamed El-Etreby, Chairperson of Banque Misr, said that the CBE’s decision to cut interest rates would boost investment and debt service, as it contributes to reducing the state budget deficit.
He pointed out that the CBE made its decision in light of the decline in the annual rate of core inflation to 5.9% in July, adding that banks will reduce the return on deposits and savings certificates after the decision.
El-Etreby pointed out that Banque Misr will hold a meeting to discuss the fate of the interest rates and yields on CD.
Ashraf El-Kady, Chairperson and Managing Director of the United Bank, said that the CBE’s decision is an indicator that Egypt is on the right track, noting that CBE is moving forward with its “great” policy aiming to protect and boost the national economy.
He added that Egypt’s economic indicators are improving across the board and at a faster pace than expected, which is reflected through the appraisals of international institutions and local and foreign experts.
He explained that interest rate cuts would be in favour of local manufacturers and products because it will reduce their financing costs, in addition to increasing the rate of turnover, and reduce the budget deficit.
El-Kady pointed out that the Egyptian market and government debt instruments are still attractive to foreign investment, and ensure the flow of foreign currencies, especially with what is happening in countries such as Argentina and Turkey, and therefore Egypt is a haven for foreign investment.
For his part, Yehia Aboul Fotouh, NBE Vice Chairperson, said that the CBE’s decision to cut interest rates came promptly with the decline in inflation, adding that it would promote investment and reduce the budget deficit.
Aboul Fotouh pointed out that despite the interest rate cut by the CBE, depositors still have the opportunity to obtain a yield, through savings certificates, where the return covers inflation rates.
He pointed out that there is a high demand from customers to purchase certificates during the past period and even today, where the proceeds to date amounted to about EGP 670bn.
Similarly, Head of the Treasury and Capital Market sector at the Industrial Development Bank (IDB), Haitham Abdel-Fattah, said that the general trend within banks will be towards reducing interest rates, especially on long-term savings certificates.
He pointed out that the bank will hold a meeting on Sunday to discuss the decision, pointing out that the response of each bank depends on its circumstances and its position of liquidity.
Abdel-Fattah pointed out that CBE’s decision to cut interest rates by 1.5% is an indication that it has shifted from targeting inflation to targeting growth, especially after in achieving its inflation target.
Moreover, he added that the decline in inflation rate in July gave the CBE more room to reduce interest rates, given the real interest rates of about 7% positive interest, where the CBE main interest rates were 15.75% for deposit against 8.7% in headline inflation, which represents a widening of the extent to which paves the way for further cuts in the future.
Egypt’s banking sector awaits the launch of the first treasury bills (T-bills) auction next Sunday to find out the trend yield on government debt instruments and the extent of its response to the interest rate cuts.
The Ministry of Finance issues five auctions for debt instruments weekly, including T-bills on Sunday and Thursday, while treasury bonds are offered on Monday.
This came at a time when yields on T-bills of 182 days (6 months) fell to 16.9% compared to 17.9% in the previous auction, while the return on 357 days T-bills fell to 16.5% compared to 17.3% in the previous auction.
According to a research note issued by Beltone Financial, the move will revive investment sentiment across the board; yet no pressure on imports bill before another 200bps cut.
However, the investment bank believes another 200 bps cut remains key for a material impact on unlocking CAPEX lending potential.
The research note said that the firm does not see yields reflecting the full policy rates cut for long, with downward pressure limited to the coming weeks’ auctions, the key support of a stronger EGP.
“We still believe treasury yields will revert to the 16-17% range. We believe yields priced in an expected easing cycle returning to the 17% territory in recent auctions. Among the emerging markets with comparable yields, Egypt still stands out with its improved macro indicators and +5% GDP growth,” the note added.
In regards to currency, Beltone believes that all odds in favour of a stronger EGP, which we see continuing through 2020, with healthy limited fluctuations within the EGP16-17 per US Dollar range.
Moreover, Beltone reiterated Overweight call on Egypt’s equities as the move re-ignites the key market trigger we had set in December 2018 for a bull cycle in the market. We maintain our top picks and see trading momentum in key beneficiaries.
Finally, the note concluded that there is room for another 100bps cut in 4Q19 and 300bps cut in 2020, citing muted inflationary pressures, coupled with the solid macro stance, will allow for the continued easing cycle this time. Yet, Beltone still sees the cuts scattered through the year favouring a 100bps magnitude, given the pattern the CBE has been following and the expected quarterly revision to fuel prices.
Radwa El-Swaify, head of research at Pharos Holding investment bank, said that the CBE’s rate cut of 150 basis points fell within Pharos’ forecast range of 2% to 3% in 2019, leaving around 1.5% before year’s end.
She pointed out that her analysis is based on several factors, namely that the inflation rate that is less than 9% on an annual basis, which is below the target of 9% (+/- 3%) announced by the CBE by the end of 2020. This means that Egypt has reached the target one year ahead of schedule.
She also found that average prices for vegetables and fruits fell by 15-25% in August as a result of supply management, which means that inflation levels in August may be tamed and may come in below expectations.
She explained that the effective interest rate was higher than 5% (3.5% after today’s cut), well above the 2% average.
She pointed out that the yield by foreigners from their investments in domestic debt instruments has become very attractive, with the appreciation of the pound against the dollar since the beginning of the year to date, as well as the relative decline in the levels of risks surrounding Egypt’s macroeconomic conditions compared to other emerging markets.
“This means we could see a 2-3% interest rate cut without affecting the appetite for investment in local debt instruments,” She said.
Furthermore, she stressed that cutting interest rates would support the state budget and the reduce financing gap, which could reduce the need for new loans.
The impact of the rate cut on investment will be felt in the second half of 2020, after a total reduction of 3-5%, she noted.