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CBE expects inflation to average under 6% in Q4 2020 - Daily News Egypt

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CBE expects inflation to average under 6% in Q4 2020

Interest rate cut currently provides adequate support for economic activity, consistent with achieving price stability in medium term: MPC

The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided, last Thursday, to cut its interest rates by 0.5%, with overnight deposit and lending rates settling at 8.25% and 9.25%, respectively. Credit and debit rates as well as main operation reached 8.75%.

In a statement, the MPC added that Egypt’s annual headline urban inflation recorded 4.5% in October 2020, up from 3.7% in September 2020.

The increase in annual headline inflation remained mainly driven by the higher annual contribution of food items, as well as regulated items.

This comes as negative annual food inflation eased for the second consecutive month. In the meantime, annual core inflation increased to 3.9% in October 2020, up from 3.3% in September 2020.

Nevertheless, annual inflation rates continued to reflect muted inflationary pressures.

In a related context, the MPC said that preliminary figures showed that the real GDP growth for fiscal year (FY) 2019/20 recorded 3.6% in October 2020, compared to 5.6% a year earlier.

Growth was dragged downwards in the second quarter (Q2) of 2020, mainly due to the partial lockdown measures that were implemented to contain the novel coronavirus (COVID-19), to register -1.7%, down from 5.0% in Q1 of 2020.

The pickup in consumption in Q2 of 2020 was not enough to offset the combined contraction in investments, and to a lesser extent in net exports.

This was also reflected in the unemployment rate, which recorded 9.6% in Q2 of 2020, up from 7.7% in Q1 of 2020.

Meanwhile, leading indicators for Q3 of 2020 continue to show gradual signs of recovery.

Globally, economic activity remained weak despite some recovery, international oil prices broadly stabilised, and global financial conditions continued to improve, supported mainly by policy measures despite the ongoing uncertainty.

The outlook for inflation in Q4 of 2020 is estimated to be in the low single digits range, with increasing likelihood of coming under the inflation target floor of 6%. This further confirms the muted inflationary pressures in the medium-term.

Because the path for current policy rates remains a function of medium-term inflation expectations rather than current inflation outturns, the MPC decided to cut key policy rates by 50 basis points. The reduction in key policy rates in the MPC meeting provides appropriate support to economic activity, while remaining consistent with price stability over the medium term.

Hussein Refaey

The MPC closely monitors all economic developments and will not hesitate to utilise all available tools to support the recovery of economic activity, within its price stability mandate

Commenting on the interest rate cut, Hussein Refaey, Chairperson and Managing Director of the Suez Canal Bank (SCB), said that the CBE’s decision was positive in light of the slightly high unemployment rates. He added that a push was needed for the economy, especially in light of an expected slowdown in Europe due to lockdown measures.

He said that the interest rate cut may reflect positively, as work must continue to increase financing and support the stock exchange and other sectors. This is in line with the CBE’s decision to reduce interest rates to stimulate the market.

Moreover, banking expert Mohamed Abdel Aal said the MPC’s decision means it prefers to continue its growth-driving policy and reduce the cost of financing, to give different productive sectors greater capabilities to face the repercussions of the coronavirus shock since the beginning of the year. The decision also reflects an expectation of inflation rates to continue their decline in a clear direction for stability within the framework of the CBE’s targets.

Banking expert Mohamed Abdel-Aal

Abdel Aal added that this means there is set to be a continuation of achieving a real return on the Egyptian pound, compared to other emerging country currencies, which supports the local currency’s exchange rate, making it more attractive to local savers and foreign investors.

He also said that this reduction will help reduce the state budget deficit and the cost of public debt, pointing out that with the synergy of the new reduction with previous cuts, this will definitely help revitalise the Egyptian Exchange (EGX).

Abdel Aal said that the MPC is currently focusing on adopting a long-term stimulus policy in line with the state’s policy to stimulate economic growth and support all its activities to confront the COVID-19 pandemic in the economic sectors affecting production and employment. This is also in line with controlling inflation and achieving price stability, especially with the continued state of uncertainty regarding a second wave of COVID-19 in Europe and the US.

This could lead to a renewed global shut down and the suspension of supply lines for goods and production means necessary for the continuation of some industrial activities in some countries, including Egypt.

In the same context, banking expert Tarek Metwally said that the current rates of inflation and the stability of the exchange market, with the return of foreigners to invest in government debt instruments, and the increase in foreign exchange reserves for the third month in a row, have allowed the MPC the opportunity to reduce the interest rate.

Monette Doss

Monette Doss, a senior analyst for the macroeconomic and financial service sector at HC Securities and Investment, had expected earlier that the CBE would cut its interest rates by 50 basis points. She noted that this would take place in order to stimulate private investment and consumption and drive GDP growth, especially in light of the potential second wave of the COVID-19.

Doss also expected that foreign flows to the Egyptian debt instruments market will not be affected due to the low returns. She added that, compared to other emerging markets, Egypt offers an attractive real return after taxes at 3.56%, by considering the rate of Treasury bills (T-bills) for one year at 13.6%, and inflation expectations at 8.0% in 2021, in addition to 15% taxes on T-bills imposed on US and European investors.

She added that this return is significantly higher than Turkey, which offers a real interest of -1.60%, with the rate of T-bills for one year at 9.6%, and Bloomberg’s inflation forecast at 11.2% for 2021 and 0% taxes, given Egypt’s lower risk level compared to Turkey. The five-year credit default swap (CDS) in foreign currency is now 408 in Egypt compared to 528 for Turkey.

Topics: CBE inflation

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