Naeem Research forecasts that the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) will keep interest rates on hold following their expected meeting on Thursday.
The continued freeze follows on from the MPC’s slashing of policy rates by 300bps at an emergency meeting on 16 March.
“While our preliminary estimates do indicate a sizable uptick in domestic inflation in March due to the prevalent abnormalities resulting from the coronavirus (COVID-19) pandemic, leading to intensifying demand and pull factors amid concerns of supply shocks, we however, expect the CBE to maintain rates until normality is restored across global economies and supply chains (amid the ongoing disruptions led by lock-downs implemented by various nations)”, Naeem Research said in a statement.
The CBE is expected to maintain the status quo on interest rates, in line with cabinet measures, whilst adopting parallel policy measures to contain inflation.
Naeem Research expects monthly inflation rates to accelerate in March and April, due to intensifying demand-pull factors on volatile food items due to the ongoing coronavirus pandemic. It added that there will be added cost-push impacts on medical supplies, detergents, and hospital services during this period.
The CBE has already implemented measures to limit the sudden surge in money supply, by reducing withdrawal and deposit limits to EGP 10,000 and EGP 50,000 for individuals and corporations, respectively. Naeem Research noted that the move is intended to rationalise domestic consumption and limit panic buying. The group added that the measures are set to contain exorbitant price increases and reduce hoarding of goods by wholesalers and traders. These measures would act in parallel with preserving the domestic banking sector’s liquidity, and mitigate the risks of dollarisation.
With the government likely to cut fuel prices by 10%, in addition to the energy price cuts already announced in recent weeks, the measures are expected to offset variables in containing inflation within single digit rates
According to Naeem Research’s analysis, a change in policy rates would have limited impacts from a fiscal and carry trade investment angle. Following the 300bps emergency rate cut, Egypt’s real interest rate should have amounted to 4.5%. However, with local treasury yields having corrected by just 1%, market-priced real interest rate, still stands at a high of 7%. With hot money outflows estimated to amount to $10bn starting March, a re-influx of FPI inflows into Egyptian debt, is more a factor of global dynamics.