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Cairo – Mubasher: The Egyptian central bank is expected to reduce interest rates from about 400 basis points (4%) until the end of 2020, announced Beltone Research.
Beltone said in a research report released on Saturday that he saw an opportunity to cut interest rates by an additional 100 basis points in the fourth quarter of 2019 and by about 300 basis points in 2020 .
According to the report, the outlook is calm under inflationary pressures and a consistent macroeconomic situation allowing the continuation of the monetary easing cycle.
Beltone said it was likely to reduce interest rates sporadically throughout the year by 100 basis points, in light of the trend followed by the Central Bank and of the expected quarterly review of the price of fuel.
The report anticipates that the rate cut will take place at the Monetary Policy Committee meeting of 14 November 2019 and an additional reduction of 300 basis points in 2020.
The report continues: "There are three other major factors that influence interest decisions, including foreign flows of fixed income instruments, after the impact of falling interest rates. Interest on income and the second performance of the net foreign assets of banks and the Central Bank of Egypt. "
The third factor is the stability of the Egyptian pound against the dollar in the expected range between 16 and 17 pounds.
The MPC decided to reduce the deposit and lending rates and the main transaction price by 150 basis points, bringing them down to 14.25%, 15.25% and 14.75% respectively.
The credit and discount rate was also reduced by 150 basis points to 14.75%.
This represents the removal of 450 basis points out of the 700 basis points raised by the Central Bank of Egypt since the introduction of the pound in 2016.
The resolution exceeds expectations
Beltone said the decision exceeded expectations and market estimates of a rate reduction of 100 basis points.
"This means a recovery in the monetary easing cycle, stalled since a 100 basis point cut in February 2019, and confirms Beltone's vision of containing inflationary pressures in the second half of this year."
Given the inflation implications related to the implementation of the automatic fuel pricing mechanism and the electricity price increases contained in July 2019, the absence of price shocks up to the point of At the end of the year pleads for keeping inflation in the central target range at 9% (بالمائة 3%) until the end of 2020.
According to the report, domestic fuel prices will be revised by the end of September 2019, in expectation of unchanged price stability due to the strength of the pound as well as lower oil prices below the budgeted price of $ 67 per barrel.
The Egyptian Central Bank (CBE) said in a statement that monetary easing policies were facilitated by inflation reaching its lowest level in four years (8.7% in July). At the same time, the beginning of global monetary easing and falling oil prices help contain inflationary pressures.
A bold decision
According to the report, the central bank's decision on interest rate cuts is "bold" and goes beyond normal cuts, thereby renewing investor confidence.
It is likely that the import bill will not be under any pressure before reducing interest rates by another 200 basis points.
Declining interest rates improve the business climate, especially for local investors, but additional cuts of 200 basis points will be required to have a real impact on the prospects for recovery of capital spending, says The report.
Reflection on Treasury bills
Treasury bills and Egyptian treasuries will remain attractive despite falling interest rates, boosted by the high value of the pound and higher real interest rates due to the slowdown in inflation, said The report. Among emerging markets with similar returns, Egypt is still characterized by improved macroeconomic indicators and GDP growth of + 5%.
He predicted that treasury bill yields would not reflect the full interest rate reduction policy for a long time, and we are seeing auction pressures only in the coming weeks, which is a major support for rise in the pound sterling.
Treasury yields are expected to return to a range of 16 to 17%, after pressures from the rest of the month from August to mid-September, regardless of the direction of interest rate policy. ;interest.
Value of the high pound
"All the possibilities you plan to continue until 2020 are in the direction of an appreciation of the pound, with limited fluctuations in the range of 16 to 17 pounds sterling against the dollar , which will continue to be needed to help the Central Bank of Egypt maintain the inflation target and continue the monetary easing cycle, "Beltone said.
It expects the price of 16 pounds against the dollar to be the maximum level of this upward trend in the pound, as rising above these levels will boost demand for the dollar, especially for wholesalers. and retailers currently working in imported consumer products as well as consumer goods firms seeking to purchase raw materials. Low cost.
She said the positive outlook for the Egyptian pound depended on improving the country's foreign exchange earnings, as well as the positive impact of changing the net oil balance in order to clear a surplus for the first time since 2015.
The pressure on the local currency has decreased, due to declining demand for the dollar due to the limited demand for non-oil imports, as well as the improvement in net foreign assets of banks, which It 's turned into a surplus of about $ 2 billion in June for the first time since July 2018.
The positive outlook for the pound sterling depends on the stability of the CBE's net foreign assets, which reach high levels of $ 15.5 billion – the account responsible for managing foreign currency reserves, reflecting the improvement in external accounts operations.
Beltone sees an adequate level of foreign exchange reserves that covers imports of 7.8 times, with the exception of significant payments in 2019, which will allow the central bank to meet the country's operational needs.
The pound also benefited from an improvement in the external debt service schedule, with the ratio of short-term debt to total external debt falling to 10.7 percent in December 2018 from 13.3 percent in June. of the same year, according to recent data from the Ministry of Finance. .
The report predicted that this rate would continue to improve with the increase in the demand for long-term bonds as the Egyptian market would join the Euro-Claire and strengthen macroeconomic stability, in line with expectations. more to reduce the inflation gap compared to the US market due to lower inflation rates at the local level..
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