By: Heba El Kordy
Cairo – Mubasher: Analysts and economists forecast that the Central Bank of Egypt (CBE) will keep interest rates unchanged in its Monetary Policy Committee (MPC) meeting on Thursday.
The reason for this is most likely due to the relative stability in inflation after the CBE raised interest rates twice in May and July 2017, analysts told Mubasher.
They forecast that the CBE will begin cutting rates by the beginning of 2018 as inflation rates begin to decline one year after the flotation of the Egyptian pound, noting that the impact of the flotation will mostly likely begin to wear off by then.
Economists expect Egypt’s inflation to fall to 20% by early January 2018.
The CBE has had to raise rates following the flotation, of the local currency in November 2016, by a combined 7%, or at 3% in November, 2% in May, and 2% in July.
Maintaining interest rates
The CBE will most likely keep interest rates unchanged during its scheduled Thursday meeting, Esraa Ahmed, macroeconomist at Mubasher Financial Services, said, noting that the CBE will begin cutting rates by 1% to 2% in January.
Trimming interest rates depends on the CBE’s agreement with the International Monetary Fund (IMF).
As for inflation, the analyst forecast that inflation will begin to drop in the second quarter of the current fiscal year, between October and December, highlighting that the main impact will be seen in November, one year after the flotation.
The CBE last announced that core annual inflation had fallen to 34.86% in August from 35.26% in July.
Ahmed expects inflation will drop from its current 34.86% to around 26% in the second quarter of FY17/18, and to 17% by the third quarter of the Egyptian fiscal year.
Egypt’s fiscal year begins in July and end 30 June the following year.
By the final quarter of FY17/18, inflation is projected to fall to 15%, which is in line with the CBE’s 10% to 16% target, the analyst added.
By examining the baseline effect, inflation will drop significantly in the second quarter of the current fiscal year, particularly in November, Ahmed said.
Inflation is likely to rise once more with the new fiscal year 2018/2019 owing to the new batch of reform measures, which include raising fuel prices, Ahmed commented, noting that despite the rise, the wave of inflation will be less severe compared to November 2016.
Two sides to the decision
Meanwhile, head of research at Pharos Holding Radwa El Swaify said that there were two possible scenarios for the CBE’s decision slated for Thursday, indicating that the bank may keep interest rates unchanged or cut them by 50 basis points (bps).
The first option, which involves keeping interest rates at current levels, will be due to the rising inflation, which higher interest rate will have no effect on, El Swaify noted. She added that the government should focus on maintaining the attractiveness of foreign investments in its treasury bills.
The analyst forecast that average inflation will drop to 19% by the end of 2017/2018 and continue falling to 12% by the end of 2018/2019.
Bigger cuts
Capital Economics projects that the CBE’s MPC will loosen monetary policy by the end of the year by cutting interest rates by more than expected.
The ratings agency forecast interest rates will fall to 12.75% by the end of 2018 and to 10.50% by the end of 2019.
November cuts
It is most likely that the CBE will keep interest rates unchanged at its MPC meeting Thursday but opt for a November cut by around 1%-2% after inflation begins to decline and flotation ripples begin to fade, said Prime Holding’s macroeconomist Iman Negm.
She forecast a drop in inflation to 20% by January 2018 and to 15% by the second half of 2017/2018.
Translated by: Nada Adel Sobhi
