Egypt Seen Holding Key Rate Well Into 2019 on Inflation Worries
(Bloomberg) -- It’s looking increasingly likely that Egypt’s central bank will wait until well into next year to cut rates.
With inflation within its target band of 13 percent (+/- 3 percentage points) and the last round of fuel subsidy cuts expected in mid-June, the central bank is likely to hold the benchmark deposit rate steady on Thursday.
- All eight economists surveyed by Bloomberg expect the central bank to keep its overnight deposit rate unchanged at 16.75 percent, and the lending rate at 17.75 percent.
- Caution could be the focus as a decision by the Finance Ministry to use a weaker exchange rate for non-essential imports has led to concerns of another, albeit short-lived, acceleration in inflation in the next couple of months.
- The central bank’s decision to end the mechanism through which investors were guaranteed the ability to repatriate their foreign currency earnings is unlikely to hit the country hard as the regulator’s net international reserves provide import cover for over 8 months.
- The move, however, may increase volatility in the pound’s exchange rate as investors will now have to go through the interbank market.
- Arguing against a rate cut in the near future is the need “to keep high rates to maintain local debt instruments as competitive as possible in the current global monetary tightening, to avoid large capital flight causing pressure” on the pound, Shuaa Securities senior economist, Esraa Ahmed, said.
- The danger of keeping rates high, however, is that it further discourages bank lending, especially to companies. That’s key for the government as it tries to boost investment and offset the money leaving the country.
- Additional inflationary pressure may surface mid-2019 with the lifting of the fuel subsidies and the implementation of a fuel pricing mechanism later in the year. Beltone Financial sees that as a key reason why rate cuts are unlikely before the fourth quarter of 2019 when it expects a 100 basis point reduction.
- READ: Egypt Expects IMF Loan Installment in January as Talks Delayed
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