Today’s Trading Playbook
Mona Bedeir | Senior Economist
KEY THEMES
After the two consecutive rate cuts in H2 2020 (-100 bps in total), the Central Bank of Egypt (CBE) has obviously slowed the pace of its monetary easing cycle. At this stage of the current dovish monetary stance, we judge that the CBE wants to keep the door open for further rate cuts on the way, by keeping expected inflation well-anchored around its targets. That said, markets are still pricing in a minimum of a 100bps cut this year. The Monetary Policy Committee (MPC) of the CBE heads into its first meeting of the year today, at a time where fundamental uncertainties are still emerging from the pandemic globally and domestically. It is still unclear if the weakness in the economy is now much more concentrated in the sectors directly affected by the pandemic—namely hospitality and tourism—or still pressuring other sectors, given the last fall in PMI reading. Although there were no signs of latent inflationary pressures, given the fall in core inflation readings in December, inflation should remain under careful scrutiny as the favorable base effect of 2020 is going to turn unfavorable. Moreover, the current loose monetary policy might prove inflationary, thus the CBE will be very cautious, given that external pressures are still weighing on future exchange rate movements. Our base case remains for now that the CBE will keep interest rates on hold in February's meeting, while the road may be more paved for a 50bps cut in March. We think the CBE still needs to assess the inflation dynamics in 2021 beyond the base-year effect and the recent uptick trend in global commodity prices.