EUR 21.34 For Business Accounts Only

Egypt macro | Reiterate monetary easing view for 2019

Expect the CBE to cut policy rates by 1% this week. This comes as key fundamentals improved further, following the 1% policy rate cut in February. The USD:EGP appreciated to 17.28, while foreign inflows in treasuries accelerated to cUSD16bn vs. just USD10bn in Dec-18. The Fed’s decision to maintain rates in 2019, and Egypt’s Fitch rating upgrade to B+ from B should also: i) enhance appetite for EGP-denominated securities, and ii) potentially facilitate higher capital inflows ahead. This justifies a lower risk premium on the EGP, in our view. We find another 1% rate cut in the upcoming meeting on 28 March necessary, to support monetary easing as a policy priority, and reduce the risk of backtracking this direction. 

Volatility in headline inflation a dilemma for inflation targeting. We reiterate our view that monthly volatility in headline inflation is not indicative of structural inflationary pressures. As of February, core inflation remained within safe bounds, at 0.8%, below the 10% mark, confirming inflationary pressures are contained. However, headline inflation jumped by 1.7% to 14.4% in the same month, mainly driven by volatility of selective fruits and vegetables. This dampened market expectations of a policy rate cut in March, a sub optimal scenario, we believe. However, in the unlikely case the CBE gives a larger weight to the headline reading and keeps rates on hold this month, we will simply roll over our expected drop in policy rates to a combined 2% in 4Q19, reiterating our expectation of a total -3% drop in policy rates this year.        

Keeping treasury yields low a fiscal priority, well-served by another policy rate cut. This is especially to neutralise any potential premium resulting from of the newly implemented tax arrangement on bank holdings of treasuries. A decline in yields has not fully absorbed the latter, with 1-year T-bill yields dropping to 17.3% as of last week, from 18.1% just prior to the decision to cut policy rates on 14 February. Additionally, yields remain vulnerable to foreign participation, and lowering the government’s cost of funding is key to supporting continued fiscal consolidation through FY19/20. The latest data shows interest cost remains a key drag on the fiscal budget, representing 36% of total expenditure during 1HFY18/19.