CBE reviews interest rate amid expectations to remain unchanged

Hossam Mounir
5 Min Read

The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) hold its fifth periodic meeting of 2020, on Thursday, to review its interest rates.

The CBE interest rate is the most important indicator of the direction local market interest rates will take.

At the MPC’s extraordinary meeting on 16 March, the CBE interest rate was cut by 3%, as part of its plan to counteract the repercussions brought on by the novel coronavirus (COVID-19) pandemic.

In two subsequent meetings, the committee decided on fixing rates at 9.25% for overnight deposits, 10.25% for lending, and 9.75% for credit, discount, and the main operation.

In its statement after these two meetings, the committee stressed that current interest rates are appropriate for the present time.

It added that the rates are also consistent with achieving the target inflation rate of 9% (±3%) in the fourth quarter (Q4) of 2020, and price stability in the medium term.

Banking expert Mohamed Abdel-Aal

On 10 June, the CBE announced that the annual rate of core inflation fell to 1.5% in May 2020, compared to 2.5% in April. It added that the monthly average rate of core inflation fell 0.3% in May, compared to 1% in April.

Banking expert Mohamed Abdel Aal expects that the MPC will fix the interest rate at its Thursday meeting. He noted that the most important reason for this is due to the inflation rate remaining in the single digits, and it is expected to remain at the CBE’s target of 9%.

Abdel Aal noted that there are also no strong prospects for inflationary pressures from rising electricity prices or any repercussions from the exchange rate.

“I agree with most observers, that the current level of interest rates achieves the best balance between interlocking targets, especially after the previous extraordinary reduction in March,” he stressed.

Abdel Aal pointed out that a noteworthy new phenomenon is acting out, notably the return of investors in emerging market government debt instruments from safe haven countries to the countries from which they migrated. This phenomenon was instigated by the beginning of the coronavirus (COVID-19) pandemic.

With the continuation of low interest rates in the US and Europe, inflows have been funnelled into emerging economies, including Egypt. As a result, maintaining the current interest rate would keep securities attractive to those customers.

“In my opinion, leaving interest rates levels as they are will support the Egyptian pound’s path in the next stage,” Abdel Aal added.

He also said that the government is adopting the scenario of a gradual return of economic activity in all sectors, which may encourage the MPC to wait regarding interest rate changes.

The expert noted that the committee may prefer to keep the interest rate unchanged at its current level. This would take into account the importance of there being a transition period covering the uncertainty caused by the ongoing pandemic.

Abdel Aal pointed out that any interest rate cut at present may contradict with the household sector’s expectations of high rates.

Radwa El-Swaify

Radwa El-Swaify, head of research at Pharos Holding, also expects that the CBE will fix the basic interest rates for the present time. This decision will be in force until to the rates require reducing or increasing, although this is not expected to happen until the end of 2020.

The research department at HC Securities and Investment also expects the CBE to keep interest rates unchanged at its Thursday meeting.

“We expect inflation rates to increase to reflect the recent decline in the price of the currency by almost 3%, along with some expected decrease in the volume of supply that may result from a slowdown in international trade, which may lead to an increase in the prices,” HC Securities and Investment economist Monet Doss said. “Consequently, we expect the inflation rate to reach 8.4% during the remaining seven months of 2020, within the limits of the central bank’s inflation target at 9% (±3%) for Q4 of 2020, and accordingly, we expect the CBE to keep rates unchanged on Thursday.”

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