The Central Bank of Egypt’s (CBE) last decision to cut its benchmark rates by 50bps came as a bolt from the blue. However, given the magnitude of the cut, we do not think there is a complete shift in the CBE’s cautious stance. According to the CBE’s press release, “the reduction of policy rates provides appropriate support to economic activity, while remaining consistent with achieving price stability over the medium term.” Nevertheless, the reduction should have a limited effect on (1) the lending activity of the private sector which already has access to cheaper credit through the CBE’s initiatives and (2) the yield on government debt instruments as foreign inflows into the debt market are still below pre-coronavirus levels. Instead, we think carry trade inflows would rather be a function of the volatile environment given the U.S elections and global uncertainty triggered by threats of a second wave of COVID-19.
While another rate cut is unlikely to trigger a material re-rating of the stock market in general, the CBE’s last move was mainly driven by significantly high positive real yield (please see yesterday’s Chart of the Day) and the muted inflation levels that are expected to end the year below the CBE’s lower band target. We expect inflation to hover around 6.2% during Q4 2020 on the backdrop of the back-to-school season and the base-year effect.