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Daniel Marc Richards - MENA Economist
Published Date: 30 September 2018
As was widely expected, the Central Bank of Egypt (CBE) kept its benchmark interest rates on hold on September 27, marking the fourth consecutive meeting at which the MPC has taken no action. This keeps the overnight deposit and the overnight lending at 16.75% and 17.75% respectively. The monetary easing with which the year began (two cuts of 100bps each in February and March) has been put on hold as reform-related price pressures and wider concerns over emerging market volatility have outweighed the need to boost domestic private sector activity and curtail escalating government debt servicing costs. While we had earlier expected at least one more cut in 2018, changing global dynamics have made this unlikely, and we now anticipate that the CBE will hold rates through the end of the year. In 2019 we expect 200bps of cuts.
Although comparative currency stability has led inflation to fall far from a peak of 33.0% in mid-2017, the latest raft of subsidy cuts initiated at the start of the fiscal year has seen price growth tick up once more over the past several months, from 11.4% in May to 14.2% at the latest print in August. While this is within the central bank’s target range of 13.0% ± 3, it is unlikely to take any meaningful leg lower over the coming months, especially if the fuel indexation mechanism is introduced by year-end as planned. With Brent futures closing above USD 80/b for the first time since 2014 over the past week, a more reflexive pricing structure will feed through to increased costs at the pump. This provides incentive for the bank to continue holding the benchmark rates static given the squeeze on real rates higher inflation would mean.
Source: Bloomberg, Emirates NBD Research
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