You'll be signed off in 60 seconds due to inactivity

English news

20-May-2018

CBE keeps rates on hold as we expected; highlights oil as key risk to inflation outlook

In its Monetary Policy Committee (MPC) meeting on Thursday, the Central Bank of Egypt (CBE) decided to keep its policy rates on hold, in line with our expectations. The overnight deposit rate was left at 16.75%, the overnight lending rate at 17.75% and the discount rate at 17.25%. 
 
CBE noted in its statement that the increase in international oil prices over the past two months led to “the materialisation of an upside risk to the domestic inflation outlook,” hinting that the sharp increase in oil prices was the key reason behind its decision to pause an easing cycle it started earlier this year. In addition, the statement highlighted that “risks from the external economy continue to include the pace of tightening financial conditions,” likely hinting to the recent weakening of the USD-EGP in the past couple of weeks, which was initiated by portfolio outflows on the back of heightened global volatility. CBE’s decision and policy statement have matched our view in terms of an elevated risk profile for inflation in light of higher oil prices and global market volatility. We see Thursday’s decision as further boosting CBE’s policy credibility in setting inflation expectations. 
 
The upcoming round of fuel price hikes this summer – as already is included in the budget presented to Parliament – is another reason to expect rates to remain on hold over the coming few months. As such, we expect rates to remain on hold until end of 3Q18, as the CBE monitors the impact of the fuel subsidy cuts on inflation, as well as global oil prices. The prospect for a rate cut would start to arise in 4Q18, assuming there would be no negative surprises to inflation from the subsidy cuts, though such prospect will also continue to depend on the level of oil prices at the time. If oil prices remain elevated six months from now (mostly above USD75), then CBE is likely to have limited room to resume its easing cycle, given the government’s target to liberalise fuel prices by mid-2019. Reaching this target at such elevated prices would clearly pose upside risks to inflation.
 
We stick to our view that current weakness in USD-EGP is largely temporary and is not setting a new trend for the currency. The weakness was initially driven by some portfolio outflows in light of global volatility in the emerging market space but was then extended on the back of some additional demand from the local corporates (whether due to seasonal demand for Ramadan or as a way to hedge their currency needs). The market has stabilised today, with the EGP reversing some of its losses; we expect calmness to gradually restore to the market as outflows ease. Key risks to our outlook is another wave of heightened global volatility. On the positive side, we note that foreign investors have been able to smoothly exit the market – with decent volumes in a short period of time – with the currency showing a healthy volatility in reaction to market dynamics.

Mohamed Abu Basha

 

 

Learn more about the cookies we use.