CBE likely to continue with gradual monetary easing - Capital Economics
Middle East & North Africa Economics

CBE likely to continue with gradual monetary easing

Middle East Economics Update
Written by James Swanston

The Central Bank of Egypt (CBE) cut interest rates by 50bps at Thursday’s MPC meeting after a six month pause to the loosening cycle. Policymakers are likely to remain cautious about future easing, but we think rates will be reduced gradually over the next year or so to support the economic recovery.

  • The Central Bank of Egypt (CBE) cut interest rates by 50bps at Thursday’s MPC meeting after a six month pause to the loosening cycle. Policymakers are likely to remain cautious about future easing, but we think rates will be reduced gradually over the next year or so to support the economic recovery.
  • The decision to lower the overnight deposit rate by 50bps, from 9.25% to 8.75%, came as a surprise to analysts – only three of the 18 polled analysts expected a cut, albeit a much larger 100bp reduction. We had expected rates to be left on hold, but given the economic backdrop and possible signs that the ground was being laid for an easing of policy (see here), a rate cut did not come completely out of the blue.
  • The accompanying statement pinned the decision on weak inflation. The headline rate eased from 4.2% y/y in July to 3.4% y/y in August, the second lowest rate in 14 years and well below the central bank’s target range of 9±3%. (See here and Chart (2)) Core inflation, which includes some food products, stood at just 0.8% y/y in August. And the central bank echoed our view that inflation will hover around the lower bound of the end-year target in the final few months of the year. (See here.)
  • Meanwhile, Egypt’s recovery from the coronavirus crisis has, so far at least, been weak. The drop in industrial production has eased recently, but output was still 12.2% y/y lower in July. (See Chart 1.) The whole economy PMI remains below the 50-mark that, in theory, separates contraction from expansion.
  • The central bank may have also wanted to push back against the recent appreciation of the pound. The currency has risen by a further 1% against the dollar since the last MPC meeting and recently hit its strongest level since March (See Chart 3.) High real interest rates have been a key factor supporting the currency in recent months, but we’ve warned before that the pound is looking increasingly overvalued. (See here.)
  • Looking ahead, with inflation set to remain weak and the CBE’s focus shifting away from supporting the pound the door is open for further monetary easing. Policymakers’ cautious approach in recent months probably means that rate cuts will probably be off the cards at the next couple of meetings. But by end-2021, we think the overnight deposit rate will be lowered by 175bp to 7.00% – this is more easing than the consensus currently expects. (See Chart 4.)

Chart 1: Industrial Production

Chart 2: Consumer Prices (% y/y)

Chart 3: Egyptian Pound (vs. $, Inverted)

Chart 4: Overnight Deposit Rate (%)

Sources: CAPMAS, CEIC, Refinitiv, Capital Economics


James Swanston, MENA Economist, james.swanston@capitaleconomics.com