Cairo - Mubasher: Pharos Research expects the Monetary Policy Committee of the Central Bank of Egypt (CBE) to keep interest rates unchanged in March during its upcoming meeting next Thursday.
Financial conditions in March continue to depict tightness that is close to February’s level.
Another interest rate hike is not needed. On the other hand, an interest rate cut is not appropriate due to the aforementioned inflation level and outlook, the research firm explained in a recent report.
“The one-year treasury bill yield rose from an average of 19.03% in February, to an average of 19.24% in March. The slope of the yield curve remains negative, which reflects tight monetary conditions," it added.
The real effective exchange rate (REER) depreciated by 12.5% month-to-date.
“We reiterate that a REER depreciation makes domestic assets more attractive for foreign investors; hence, capital inflows would increase the liquidity in the economy,” Pharos said.
The EGX30 index rose 9.1% in March resulting in an increase in liquidity; however, it is expected to resume trading sideways this week.
Pharos also reiterated that it does not expect a significant monthly price increase, in reaction to the exchange rate movements, due to the wide decline in sales volumes across different sectors.
Monthly headline inflation decelerated from 4.1% month-on-month in January to 2.6% in February.
“Core food items, which exclude fruits and vegetables, continue to be the major contributor to the increase in prices in February.”
“The exchange rate has stabilised at EGP 18 per USD, which is above EGP 15.8 recorded in February and below the historical-high level of EGP 19,” the report stated.
However, a rise in inflation rates is expected ahead of mixed seasonal effects, as the holy month of Ramadan traditionally marks a relatively higher consumption level compared to the rest of the year, which tends to push monthly inflation rates upwards.
On the other hand, Pharos noted that the risk of an aggressive import activity is subdued given the current high level of exchange rate.
Meanwhile, the wheat harvest season, which starts by mid-April 2017, possibly diffuses sharp food price increases.
