Economic Analysis - No More Hikes In Current Cycle - NOV 2017


BMI View: The Central Bank of Egypt has now come to the peak of its hiking cycle, but will wait until 2018 to start easing . With price growth still elevated, and high interest rates helping to attract strong inflows of foreign capital, we expect the pace of the cutting to be fairly moderate next year .

At its last meeting, held on August 17, the monetary policy committee (MPC) of the Central Bank of Egypt (CBE), held its primary interest rates at current levels, and we expect that they will remain so through the remainder of 2017. The overnight deposit rate was held at 18.75%, the overnight lending rate at 19.75% and the rate of the CBE's main operation at 19.25%. In light of this, we have revised our year-end forecasts for Egyptian interest rates. Previously we had anticipated that one more hike would be implemented given rising inflation and pressures from the IMF - which entered an agreement with the Egyptian government in November 2016 - to raise interest rates ( see 'Hiking Cycle Not Over Yet', July 14 2017). However, with the MPC having taken a pause at its latest meeting, we now believe that the hiking cycle has come to an end, even though inflation will remain high over the coming months. We expect that rates will be maintained at current levels through the remainder of the year, before gradual easing takes place through 2018.

Inflation Will Remain High Over Coming Months
Egypt - Inflation, % y-o-y
Source: Central Bank of Egypt, BMI

Very high inflation will prevent the CBE from cutting in 2017, even though we do not believe that the high interest rates in Egypt will have a marked impact on curbing price growth. Headline consumer price index inflation in Egypt was recorded at 33.0% y-o-y at the latest print in July, another leg up after it had dipped below 30.0% in May and June. The average rate now stands at 30.5% y-o-y over the first seven months of 2017, compared to an average of 10.2% between 2012 and 2016, and we expect that it will remain over 30.0% until the end of the year, when the November 2016 depreciation of the pound will have fed through. This will have the greatest effect on bringing inflation down, but the CBE will be reluctant to cut rates for the time being given the IMF's support for them. Further, inflation will remain in double digits, given the ongoing reform to subsidies and taxes which is causing utility tariffs and goods prices to rise.

Foreign Ownership Back To Pre-Revolution Levels
Egypt - Outstanding T-Bills, EGPmn
Source: Ministry of Finance, BMI

In 2018, we forecast cumulative cuts of 300 basis points, projecting that the spread between the different interest rates will be maintained. We anticipate that these cuts will begin in Q2 or Q3, as lower inflation will enable the MPC to slash rates and encourage greater demand. This would take the overnight lending rate to 16.75% at year-end. However, while the MPC will be keen to cut rates, we maintain that the cutting will be fairly gentle. Inflation will remain fairly high, even if it halves from current levels - we forecast an average of 13.0% next year. Further, high interest rates in Egypt have helped attract substantial inflows of foreign investment into local debt in recent months, helping to build up CBE reserves and stabilise the currency. Foreign ownership of treasury bills has risen sharply in recent months, and now exceeds pre-2011 revolution levels. Cutting too fast, too soon, would jeopardise these inflows, potentially leading to hot money flight and a sharp sell-off in the pound once more.