HC Securities & Investment bank expects the Central Bank of Egypt (CBE) to cut rates by 50 basis points (bps) in its upcoming meeting on 14 November.
Economist and banking analyst at HC, Monette Doss said on Sunday, “We see inflationary pressures largely subsiding till year end to an average of 4.6% for fourth quarter in 2019 (4Q19), with December monthly inflation being the largest, at an expected 7.8% due to unfavourable base effect, well below the CBE target of 9% (± 3%) for 4Q20.”
These factors make room for the CBE to proceed with monetary easing to stimulate economic growth and stock market activity, Doss added, noting that net foreign assets of Egypt’s banking sector increased to $5.2bn in September from $3.7bn in August. This implied healthy foreign currency inflows into the economy, and thus supporting a strengthening currency with the EGP appreciating 10.3% year to date.
Moreover, in the global context of monetary easing, the Federal Open Market Committee lowered its benchmark funds rate by 25 bps by the end of October to a range from 1.5% to 1.75%. Turkey has also cut its key rates by 250 bps last month, Doss said.
“We believe that Egypt’s carry trade will still be attractive as its positive real interest rate will still be higher than other emerging countries like Turkey, even after we factor in our expected rate cut,” Doss mentioned.
HC estimates Egypt’s real interest rate at 4.07% compared to Turkey’s real interest rate of 1.94%, she added, noting that Egypt has lower risk as implied by its 5-year credit default swap. (CDS) of 318.38 compared to Turkey’s 5-year CDS of 329.17.
It is worth mentioning that the CBE’s Monetary Policy Committee (MPC) at its last meeting on 26 September 2019, reduced policy rates by 100 bps after undertaking a 150 bps rate cut in August 2019.
Egypt’s annual headline inflation decelerated to 4.8% in September from 7.5% in the previous month, with monthly inflation reflecting no monthly price increase, compared to 0.7% in August, according to data published by the CBE.
Egypt’s annual core inflation also decelerated to 2.6% in September from 4.9% in the previous month, with the monthly core consumer price index (CPI) decreasing 2.26% compared to a decrease of 0.36% in August, the CBE data showed.