Beltone Financial expects to another cut in interest rates between 50-100 basis points (bsp) by the Central Bank of Egypt (CBE) in the next meeting of the CBE Monetary Policy Committee (MPC) scheduled for 28 March.
Beltone Financial explained in a research note issued on Monday that the increase in inflation readings does not affect its forecast for inflationary pressures during the first half (H1) of 2019.
“We expect interest rates to decline once more in H1 of 2019 before the automatic pricing mechanism of petroleum products is applied,” the research note said, pointing out that its forecast relies on many factors, most importantly, the continuation of favourable international conditions in the light of limiting the restrictive monetary policy in a way that supports the CBE’s continuation of expansions in monetary policies.
“In the light of the absence of many supporting factors like a change in the base years, it was expected to see an increase in inflation rates beyond the rates of December 2018, which pushed the CBE to decrease the target inflation rate to 10% in 2021. We expect the readings in general to remain affected by the uncertain volatile path of food commodities, making the increases in inflation only temporary,” Beltone said.
The investment bank added that the mission of CBE is to achieve balance between growth and inflation, in addition to supporting the government’s reform programme, where reducing debt service burdens plays a major role, as it represented 10% of the GDP in 2017/18.
Continued inflows into fixed-income instruments confirm a renewed desire of investors, despite falling government bond yields, which shows a limited pressure on the local currency. This is another factor that affects major interest rate decisions, according to Beltone.
Furthermore, the research note sees limited opportunities for future interest rate cuts, as seasonal inflationary pressures will shift to real negative interest rates by the end of the second quarter of 2019, before inflation eases by the end of the year.
Beltone stressed that reducing the interest rates before the expected time in February 2019 aimed to enhance the confidence of investors, as it sends a strong message of trust in the local currency, all of which reduces the economic component in the process of decision-making.
Annual inflation was up by 14.4% in February, from 12.7% in January 2019, beating Beltone’s 13.5% forecast. This came as a result of the increase in the prices of food commodities by 15.4%, compared to an increase of 12.5% in January.
According to Beltone, the increase was due to an increase in the prices of fruits and vegetables by 7.4% on a monthly basis, resulting in an annual increase of 32.7% from 23.7% recorded in January 2019.
At the same time, all other sectors remained unchanged, with the exception of the clothing and footwear sector rising by 9.9% from 7.6% last month as a result of the change in the base year.
The monthly inflation rate rose to 1.7% from 0.6% in January, which is more than Beltone’s forecast of 1%, and core inflation rose by 9.2% from 8.6% in January.