The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) will meet today amidst a wide range of concerns over the outlook of domestic demand, which have been evoked by continued disinflation and global uncertainty. The underlying trend in core inflation is still muted, and it will likely remain so in the coming few months. This is a reflection of the labor market slack caused by the COVID-19 crisis, which will reduce real wage growth and underlying price pressures for a substantial time. Also, the strength of the EGP will add a disinflationary force to the current inflation outlook. However, we think the MPC will likely opt to maintain the status quo in today’s meeting, driven by four main reasons:
1) The CBE is reassured of achieving its inflation target of 9% ±3% by the end of Q4 2020, and the inflation expectations are anchored around that target.
2) Having recently increased the value of private business lending initiatives from EGP100bn to EGP200bn indicates the CBE’s bet on the initiatives’ effectiveness to support the private-sector activities. We note that private sector credit growth has been on a sustained upward trend since March 2020, reaching 17.5% y/y in July, up from 8.4% y/y in March.
3) Prolonged global uncertainty still lingers as the risk of a second COVID-19 wave continues to cloud the trajectory of global recovery.
4) There is no immediate need for the CBE to make a move that may jeopardize capital inflows in the local debt market. This is in view of the Fed’s new “average inflation targeting” strategy, which pledges significantly lower interest rates for at least the next three years.
We see the MPC maintaining its accommodative stance in the medium term and focusing on reviving the economy through macro-prudential measures that should be more effective in presence of prolonged uncertainties. We expect the MPC to keep its dovish tone concerning future easing as it has previously vowed support for the economic recovery within its price stability mandate. The accommodative stance should gain support from the favorable inflation environment and the recovery in FX revenues, as tourism activity started to pick up. That said, we expect the CBE to continue releasing liquidity over the remaining months of 2020 through its open market operations (OMO) to support lending activity, while maintaining a wait-and-see stance when it comes to further rate cuts.