CBE keeps rates on hold

The Central Bank of Egypt (CBE) kept its benchmark overnight deposit rate on hold at 8.25% at its February 4 meeting, in line with our expectations. This is despite a fall in inflation in December. Our thinking remains that there will be a further rate cut this year, but the timing of this will hinge on the January and February inflation prints, with the January figures published on February 10. For now we project a 50bps cut at the March or April meeting, taking the benchmark rate to 7.75%.

Benchmark interest rates on hold for now (%)

Source: Bloomberg, Emirates NBD Research

Egyptian CPI inflation dipped to 5.4% y/y in December, from 5.7% the previous month. This was the slowest pace of price growth since October, and was the first month since August that inflation had fallen. Food prices, which fell -1.2% y/y, drove the deceleration, and the CBE specified a ‘transitory shock in tomato prices’ as contributing to this. Looking ahead, the bank identified higher oil prices as a potential inflationary spur, alongside the potential demand side pressures from a rebounding economy. For the time being, however, we think these risks are manageable, especially given the stability of the currency over the past several months. There has been a modest sell-off this past week, but given our expectation of continued dollar weakness, we do not anticipate any significant exchange-rate fueled price growth. Meanwhile, the pandemic will continue to weigh on demand to an extent for the next several months, providing a further check to inflation. 

The December dip in inflation leaves real interest rates at a healthy 2.85%, among the highest in the world. Provided there are no upside surprises to inflation over the next several months, we expect that the CBE will take advantage of this, and the global circumstances, in order to cut rates and thereby help stimulate growth and minimise government debt servicing costs. Statements by US Federal Reserve chair Jerome Powell have made clear that money will remain cheap for some time, and the global hunt for yield will ensure that Egypt remains an attractive destination for portfolio investment even if rates are cut moderately. Foreign ownership of Egyptian local debt has already staged a remarkable comeback over the past year. Having fallen to a three-year low of USD 7bn in May, foreign holdings had climbed back up to USD 26.9bn in December.