Banks operating in the local market will begin studying, on Sunday, the impacts of interest rate cuts on their savings and loan products. The move comes following the Central Bank of Egypt (CBE) decision to reduce basic interest rates by 0.5%.
At its Thursday meeting, the CBE’s Monetary Policy Committee (MPC) decided to reduce the deposit rate to 8.75%, the lending rate to 9.75%, and the main operation, and credit and discount, rates to 9.25%.
In a statement accompanying its decision, the MPC emphasised that the interest rate cut is consistent with achieving price stability in the medium term. It will also provide appropriate support for economic activity at the present time, especially after the success that was seen in containing inflationary pressures.
In the first reaction to the committee’s decision, the interest rates on variable-return certificates and some loan products linked in their pricing at the CBE interest rates automatically decreased.
In the Egyptian market, there are about 29 variable-return certificates which have been issued by 24 banks, in addition to a large number of variable-return loan products. The market is awaiting the launch of the first bid for Treasury bills (T-bills) and bonds (T-bonds) after the interest rate cut decision, to see the effect of the decision on its return.
On Sunday and Monday, the CBE is proposing to offer five bids for T-bonds and T-bills worth a total of EGP 26bn, on behalf of the Ministry of Finance. These will include EGP 8bn in 91-day T-bills, EGP 10bn in 373-day T-bills, EGP 4bn in three-year T-bonds, EGP 3bn in seven-year T-bonds, and EGP 1bn in one-year bonds.
Although the CBE’s decision to cut interest came against the expectations of many analysts and observers, it was expected by others.
Banking expert Mohamed Abdel Aal was one of those who expected a rate cut, building his expectations on the continued decline of the inflation rate curve, and its reaching an unprecedented historical rate.
He noted that inflation achieved a lower level than the CBE target, which has led to an increase in Egypt’s real interest rate within an average range of about 6%. This is one of the highest interest rates reported among emerging markets, which boosts the flow of indirect foreign investment in government debt securities.
Abdel Aal said that this matter has also strengthened the CBE’s ability to move on interest rates, and gave it more room and space to cut interest. At the same time, it will also ensure a balance between future inflation expectations and ensuring the flow of foreign exchange.
Abdel Aal emphasised that the Ministry of Finance is keen to reduce interest, as every 1% reduction in interest saves EGP 10bn for the state budget. Interest reductions also constitutes an incentive for the money market and activates dealing in shares.