Cairo – Mubasher: Whether the Central Bank of Egypt will raise or hold interest rates on 16 June, Mubasher Trade Research sees a fifty-fifty chance, describing tomorrow’s decision as an “infeasible task”.
The infeasible task is how to keep exchange rate and prices stable without hurting growth and employment prospects that are threatened by unstable private sector and higher inflation rates, the report indicated.
The Purchasing Managers’ Index (PMI) continued to rise for the second consecutive month to 47.6 in May.
Both annual headline and core inflation doubled to 12.3% and 12.2%, respectively in May. On a monthly basis, the headline and core inflation soared to 3.05% and 3.15% respectively against 1.27% and 1.24% in April a month earlier.
The research firm attributed this jump to gushing demand during the holy month of Ramadan, the state decision to hike the prices of some regulated items, as well as an increase in black market’s exchange rate from an average EGP10.34/USD in April to EGP10.95/USD in May.
Given the above facts, the Central Bank of Egypt is unlikely to either raise or cut interest rates.
However, the research firm believes that a decision to up the interest rate will help anchor inflation expectations.
The research agency sees that risks to the inflation outlook are rising as oil prices are higher at $50 per barrel. Further, more pressure on the Egyptian pound is expected to be on the horizon as the Fed may raise interest rates, namely if the improving inflation, growth, employment rates are found encouraging. Moreover, higher electricity tariffs will take effect in July 2016, let alone the adoption of the value-added tax.
It is worth noting that housing, water, electricity, gas and other fuels weights make up 18.4% of Egypt's CPI.
“In view of the above, we think this Thursday's MPC meeting will be a tight 50-50 call between raising rates and holding off rates as is for the time being”, according to the report.
