CBE sends strong confidence signal with 100bps rate cut
The Central Bank of Egypt (CBE) launched its monetary easing cycle on Thursday, in line with our view, cutting rates by 100bps (larger than our expected 50bps). The relatively large cut sends a strong signal of confidence from the CBE with regards to inflation, and rightfully so, in our view, as inflation has shown ample signs of moderation over the past six months. The CBE said in its statement that “inflationary pressures have been contained, a consequence of tighter real monetary conditions.” The statement did not provide much insight on the CBE’s future path, though it hinted towards further easing as long as monetary and real conditions continue to improve.
Easing pace to continue; important data points to monitor filter through to economy
We expect another 200-300bps rate cuts over the course of 2018, with another 50-100bps in the next meeting on 29 March. We forecast headline inflation to moderate further to 15-16% in February and 13-14% by mid-2018 before stabilising at this level given the upcoming round of energy price hikes. The CBE might then take a breather, in order to assess the impact of its rate cuts on its various monetary and real aggregates. Most notably, the CBE would seek to maintain a positive real interest rate environment and balance the risks of a strong growth environment and receding inflation pressure. The filtering through of the initial rate cuts into the real economy, mainly at the level of credit growth, will be closely monitored, in our view.
Public banks followed with sharper cuts on short-term CDs
The three largest public banks followed with a larger rate cut of 300bps on their short-term certificate of deposits with a maturity of one and one and a half years, reducing them to 17% from 20%. The three-year CD yielding 16% was cut by only 100bps to 15%. This came as no surprise with these banks seeing rising pressure on their profitability amidst the recent sharp decline in yields on Treasuries (500-600bps from July’s peak). On the balance, the new rates remain relatively high from an historical context and we therefore expect no major filtering through to the real economy from such a decision; this would require another one or two rounds of cuts before rates are less attractive for depositors and liquidity starts to trace financial/real assets.
Treasuries to enjoy the cut, but limited room for further big declines
We see the decision placing further, though limited, downside pressure on Treasury yields in the short term. While the market has been pricing in a larger 150-200bps rate cut, the CBE’s confident tone and the prospects of further rate cuts in the near future are likely to keep the market excited. We maintain our view that the decline in yields is likely to moderate over the coming few weeks/months as rate cuts have been largely priced in (especially with the easing likely to pause around the fiscal measures in 2H18) and, more importantly, foreign flows into the market moderate. Foreigners have been a key driver of lower yields at the short end of the curve and lower rates are likely to reduce incremental purchases thereby providing some stabilisation to yields, in our view. The depressed yields on the long-end of the curve remain structural given the very limited supply and hence are unlikely to see a major reversal unless supply starts to increase, which we expect to happen at a later stage this year.
Mohamed Abu Basha