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01-Apr-2018

Egypt Economics - CBE cuts rates again; we still see room for more this year

CBE delivers another rate cut

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) cut interest rates by 100bps on Thursday, coming in line with our expectation and bringing the overnight deposit rate to 16.75% and the overnight lending rate to 17.75%. The MPC’s statement highlighted the sharp slowdown inflation over the past few months, with both headline (14.4%) and core (11.9%) inflation in February “register[ing] their lowest since October and April 2016, respectively.” The statement highlighted the risks surrounding the inflation outlook as including “the timing and magnitude of potential subsidy-reform measures, as well as demand side pressures.”
 
What’s next after the second cut?

We still foresee further 100-200bps of rate cuts for the rest of the year, with a chance for another 100bps cut at the next meeting on 17 May. Until then, we highlight three key factors setting the course of near-term monetary policy, namely: i) release of two inflation data points for March and April; ii) approval of the fiscal budget for FY18/19; and iii) conclusion of the third review of the IMF loan agreement. Next fiscal year’s budget, which the Finance Minister had submitted to Cabinet last week, reportedly calls for an unchanged overall subsidy bill – including food, fuel, electricity and cash subsidies – for this year, hinting towards a fuel subsidy cut in the neighborhood of 30%, we estimate. A cut of this magnitude is likely to keep inflation steady at 12-13% in 2H18, while still providing some space for a rate cut at the 17 May meeting. Thereafter, we expect rates to be kept on hold as the fiscal reforms are implemented, and as CBE takes a breather of cuts to assess the latter’s impact on inflation.
 
Treasury yields likely more stable as locals dominate new supply

We expect yields to remain largely stable, or even see some slight upward adjustment, with Thursday’s rate cut largely expected by the market. This is especially the case now that locals are dominating the market, with foreigners just maintaining their positions by rolling maturing ones over (see Fig.3). Treasury yields below short-term policy rates provide no incentive for locals to push for lower yields, especially with no major surprises delivered on the pace of monetary easing by the CBE. This also comes after yields had fallen by around 500bps from their peak back in July, while CBE has cut rates by only 200bps so far. Yields on the longer-end of the curve have recovered in March, in line with our expectation, as they correct to a more appropriate level, and as the market starts to gradually see more supply, with rates heading lower.

Mohamed Abu Basha