The Egyptian central bank is expected to ease its monetary policy before year end, according to a research note issued by the London-based consultancy Capital Economics.
The research note expects that the Monetary Policy Committee (MPC) will start to ease the monetary policy at the end of the year, as it is expected also that the inflation will drop sharply over the next six to nine months.
Moreover, the note thinks that interest rates will be dropped much further than what was most expected.
The note added that it correctly anticipated that the Central Bank of Egypt (CBE) will keep its benchmark deposit rate Friday night unchanged at 18.75%.
Since the pound was floated last November, the Central Bank of Egypt has raised interest rates by 700bp.
The note sounded very optimistic about underlying inflation; however, the underlying inflation remained higher than consistent with the CBE’s target, the inflation jumped to 33.0% y-o-y last month, which is the highest rate since June 1986.
According to the note, Friday night’s statement stressed that retail prices recently have not been contributing to inflation and that service prices have been doing so only marginally, explaining that food prices alone were blamed for rising inflation.
In the same context, the guidance for the future path of interest rates was less dovish than before.
Earlier in July’s statement, the MPC envisaged a measured easing of the monetary stance.
Friday night’s statement stressed on the risks surrounding the inflation outlook, and it ended with a comment that such risks could lead to “a stronger than projected loosening or tightening of monetary policy.”
Capital Economics feels that the MPC is trying to dampen expectations, as with ending the tightening cycle, the rate cuts will quickly follow.
It thinks the MPC will turn towards monetary easing before the end of the year.
The note said clearly that the headline rate will fall to around 20% y-o-y by the end of the year, to about 11% by the end of 2018 and to single digits in 2019. Moreover, it is expected the policy rate to drop to 12.75% by end-2018 and 10.50% by end-2019.
In another context, the MPC committee stated that the 200bp rate hike at the previous MPC meeting was made in anticipation of the very latest increase in inflation, so the accompanying statement explained clearly that the committee did not need to tighten policy further in response.