The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) will hold a meeting on Thursday to decide the future of the bank’s basic interest rates.
The basic interest rates are used as the main indicator for the direction of interest rates in the local market.
The possible outcomes of the committee’s meeting remain ambiguous. A number of analysts and experts expect the committee to cut interest, while others predict it to be unchanged.
The MPC had lowered the interest rate by 50 basis points at its meeting on 24 September 2020, after keeping it unchanged for four consecutive meetings since April 2020.
The CBE’s basic interest rates are currently 8.75% for deposits, 9.75% for lending, and 9.25% for the credit and debit rates and the central operation.
In its statement accompanying the decision to cut interest, the MPC emphasised that the interest rate cut decision is consistent with achieving price stability in the medium term. It also provides appropriate support for economic activity at the present time, especially after the success in containing inflationary pressures.
On Tuesday, the CBE said that the consumer price index (CPI) recorded a monthly rate of 1.7% in October 2020, compared to 1.1% in October 2019, and 0.1% in September 2019. Egypt’s annual rate of core inflation stood at 3.9% in October 2020, compared to 3.3% in September 2020.
The Central Agency for Public Mobilization and Statistics (CAPMAS) said that Egypt’s urban inflation rose to 4.5% on an annual basis in October 2020, compared to 3.7% in September 2020. At the same time, the country’s monthly inflation rate recorded 1.8% in October, compared to 0.3% in September.
Banking expert Mohamed Abdel Aal said that the MPC will, from now until the end of the year, focus on continuing a long-term stimulus policy. This falls in line with the Egyptian government’s policy to stimulate economic growth, and is also in line with efforts to control inflation and achieve price stability.
He said that the high rate of inflation in October has given the MPC the green light for further interest rate reduction. On the other hand, the committee may give more attention to maintaining foreign exchange (FX) flows, meaning that they may well prefer to keep interest rates the same this time.
“Whilst awaiting the extrapolation of the development of global and local indicators, in my view, no adjustment in interest rates will be made at the CBE’s Thursday meeting,” Abdel Aal said, “This is provided that the easing plan is completed which should take place at the December meeting, which is the last meeting in the MPC’s series of meetings for this year, when a 100-basis point reduction could be made.”
Moreover, banking expert Tarek Metwally said that the MPC will be able to reduce interest rates based on a range of factors, including: the current rates of inflation; the stability of the exchange market with the return of foreigners to invest in government debt instruments and the previous reduction of interest rates; and the increase in the FX reserves for the third month in a row.
He also said that, despite the 0.5% reduction of interest at the previous meeting, its effect was very slight pending further stability of the macroeconomic indicators. There is also some waiting regarding the repercussions of the potential second wave of the novel coronavirus (COVID-19) both locally and internationally; and the impact of political changes at the global level. With these end results in place, it is only then that it will be possible to move during the next year with a clearer vision.
Tarek Galal, head of the Small and Medium Enterprises Sector and Credit Zones at the Industrial Development Bank (IDB), expects that the MPC will cut rates on deposits and lending during its Thursday meeting. He said that the reduction will be limited to 0.25%-0.5%, especially in light of the relatively stable current conditions.
The Research Department at Beltone Financial anticipates that the MPC will keep interest rates unchanged on Thursday.
It indicated that the previous CBE decisions to cut interest rates by about 350 basis points, which it took to support the local economy, was not fully reflected in the economy. At the same time, the current global changes support the vision of maintaining interest rates, with the importance of maintaining an attractive market for investment in fixed income tools in the Egyptian market amid the high price of the pound.
Radwa Al-Swaify, Head of Research at Pharos Holding, had expected the MPC to continue a gradual easing of its monetary policy, and to cut interest rates by 50 basis points on Thursday.
Monette Doss, senior analyst for macroeconomics and financial services at HC Securities and Investment, also expects the CBE to cut interest rates by 50 basis points at its meeting.
“Using our expectations of inflation rates in October, we see that the real interest rate in Egypt on short-term deposits and loans at 4.4% and 5.9%, respectively, came significantly above their 12-year average rates at -3.3% and 0.8%,” Doss said.