Will the central bank resume cutting interest rates next week?

04:46 PM

Wednesday 12 February 2020

Books – Mostafa Eid:

An investment bank expected that the central bank would cut interest rates between 0.5 and 1% during the next meeting of the Monetary Policy Committee on Thursday after February 20, while another investment bank expected that the central bank would keep interest rates unchanged.

The central bank had cut interest rates 3.5% during the second half of 2019, before kissing it at the last meeting of the Monetary Policy Committee on January 16th, to settle at 12.25% for deposits, and 13.25% for lending.

Hani Genena, head of research at Prime Investment Bank, expected the central bank to cut interest rates between 50 and 100 basis points.

Genena attributed his expectations, in Masrawy’s comment, to what he described as the suffering of the industrial private sector in particular, and the absence of inflationary pressures resulting from consumption momentum and the accompanying pressures on the employment ratios at the level of many productive sectors, as evident from the PMI since July 2019.

The PMI showed a decline in non-oil private sector activity in Egypt during January, to its lowest level in nearly 3 years, which indicates a strong deterioration in trade conditions at the sector level.

The purchasing managers report said that the strong decline in activity is linked to weak sales, and the rate of decline of new orders was the fastest in about 3 years, indicating the absence of new contracts and the decline in market movement, in addition to the decline in export orders for the fourth month in a row.

“There is no doubt that the difference between the current nominal interest rate and the inflation rate expected at the end of 2020 is wide, to allow the central bank to cut again without igniting domestic demand and inflation rates from the targeted levels,” said Genena Lamsraoui.

Mohamed Abu Pasha, a senior analyst at Hermes Investment Bank, expected that the central bank will cut interest rates by 50 basis points during the next meeting of the Monetary Policy Committee.

Abu Basha told Masrawy that although the annual rate of inflation came higher than expectations at 6.7% for cities during January, it is just a seasonal development of food prices, especially vegetables and poultry.

And the annual inflation rate for the total of the republic settled last January at the level of 6.8%, unchanged from the month of December, and rose slightly in the cities, recording 7.2%, compared to 7.1% in December 2019, according to the Central Agency for Public Mobilization and Statistics announced on Monday.

This came after the monthly inflation rate returned to achieve positive figures during January, recording 0.8%, after witnessing negative rates in November and December last, which is due to the rise in chicken prices by 11.7%, tomatoes by 21.3%, and eggplant 19.2%.

The central bank aims to achieve an average annual inflation rate during the last quarter of 2020 of 9%, with an increase or decrease of 3%.

Although Alia Mamdouh, a senior analyst at Beltone Investment Bank, believes that the central can contain inflation rates during the coming months, especially with the rise in the value of the pound and the stability of oil prices, which keeps inflation rates within the target range of the central, it expected the central bank to keep interest rates unchanged The next meeting.

Alia Mamdouh told Masrawy: “We expect the central bank to keep interest rates unchanged to test liquidity levels after the bold interest rate decisions taken during 2019, and to support the maintenance of current interest rates until inflation readings cool after the end of the impact of comparison periods, starting in February.”

Radwa Al-Swaify, head of the research department at Pharos Investment Bank, agreed with Alia Mamdouh Ali, who told Masrawy that she expects to stabilize interest rates in February, with an increase in opportunities to reduce them during April.

Radwa attributed her expectations to her suggestion that the central bank pursue a quieter policy of implementing the planned monetary easing cycle in 2020.

“By the end of this year, it is expected that the interest rate range will reach 11.25-10.25%, as we see the possibility of reducing it by 200-300 basis points in 2020, during the meetings of the Monetary Policy Committee scheduled for April, June and August,” she said.

This comes despite Pharos ’expectations that inflation rates will reach 5.5% on an annual basis, and 0.6% on a monthly basis in February, to move this year in the range from 5% to 5.5% on an annual basis, before resuming the rise in the last quarter From the year to between 6 and 8%.

And Pharos believes that the reason for the expected rise in annual inflation rates in the last quarter is that the effect of the mathematical base will not be supportive in comparison with the record decline rates recorded in the fourth quarter of 2019.

Pharos expects that the annual inflation rate by the end of the 2019-20 fiscal year will reach 5.4%.

The Shuaa Investment Bank, “Shuaa for Securities Trading Egypt”, said in a report today that keeping interest rates unchanged is the most likely scenario, especially in light of global concerns in the wake of the outbreak of the Corona virus.

He added: “We still see a 200-basis-point reduction before the end of 2020, yet we do not believe that the central bank wants to lose a lot of monetary policy flexibility early in this time of the year.”

Shuaa added: “At the same time, we believe that the facilitation may appear in other forms, such as the decision of the Central Bank of Egypt to raise the ceiling on the ratio of installments to monthly income in relation to consumer loans.”

He pointed out that the Central Bank has a lot in this context, where reducing the ratio of the mandatory reserve on bank deposits is one of the possible options.

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