The increase in Egypt’s inflation rate during November boosted the uncertainty in the local market about the upcoming decision of the Central Bank of Egypt (CBE) regarding its basic interest rates. The CBE’s Monetary Policy Committee (MPC) will convene on 24 December to discuss the fate of the country’s interest rates in its last meeting this year.
The basic interest rates are used as the main indicator for the direction of interest rates in the local market.
Last Thursday, the CBE revealed that Egypt’s monthly core consumer prices index, computed by the Bank, recorded 0% in November 2020, compared to 1.7% in October 2020, and -0.1% in November 2019. In addition, the annual core inflation increased to 4% in November 2020, from 3.9% in October 2020.
At the same time, the Central Agency for Public Mobilization and Statistics (CAPMAS) said, on Thursday, that Egypt’s consumer price index for urban consumers (CPI-U) increased to 5.7% on an annual basis in November, compared to 4.5% in October 2020.
It added that the whole country’s CPI recorded 111.2 points for November, reflecting an increase of 1.1% on October.
CAPMAS attributed this increase to the rise in prices of the following: vegetables by 25.0%, cereals and bread by 0.6%, garments by 2.7%, outpatient clinics by 0.5%, hospital services by 0.4%, hotel services by 1.3%, and restaurants by 0.5%.
This comes despite a decrease in the prices of fruit by 4.6%, meat and poultry by 0.4%, and phone and fax service equipment by 0.6%.
According to the agency, Egypt’s annual inflation recorded 6.3% in November 2020, compared to 4.6% in October 2020, and 2.7% in November 2019.
Therefore, the possible outcomes of the MPC’s meeting remain ambiguous. A number of analysts and experts expect the committee to cut interest, while others predict it to remain unchanged.
Inflation rate is still under control
Banking expert Mohamed Abdel-Aal affirmed that the current inflation rate is still under control and within the CEB’s target.
He explained that the rise in the annual inflation in November to 6.3% comes as a result of the price hike of some goods at higher rates than other goods whose prices have decreased.
“Despite the relatively high rate of inflation, in my opinion, it is actually a positive phenomenon, reflecting the boom in economic activity and the increase in demand for goods and services, due to the decline in financing cost and launching incentive initiatives,” Abdel-Aal said.
He pointed out that despite the inflation acceleration, it is still in single digits, and will remain within the CBE’s target of 9% (±3%).
Abdel-Aal expects that the inflation will remain stable between 5.5% and 6% until the end of this year, affected by the base year, and the sharp declines in the last quarter of 2019.
As for the basic interest rates, he said, it’s important to know that several factors, other than inflation, may affect the interest movements: including the current monetary policy which aims at stimulating economic growth, curbing inflation, and increasing employment at the same time.
He added that the MPC targets to support the national economy to resist the repercussions of the novel coronavirus (COVID-19) crisis, and avoid any possible risks that may arise from the pandemic’s second wave. This strategy requires continuing to pump liquidity in the market, increase public spending in national projects, and support all economic activities in general and small and medium enterprises (SMEs) and tourism in particular.
Abdel-Aal pointed out that under this policy, a further interest rate cut would be welcome, if it did not conflict with other economic strategies.
Another factor that may affect the MPC’s decision is that there is still a big difference between the inflation rates, even after their rise, and the yield curve. Normally, the difference is not more than 3% higher than the inflation rate, while it reaches up to 6% in Egypt.
The banking expert pointed out that this situation gives the CBE a chance for a further rate cut. He pointed out that if this happens, real interest rates will remain encouraging for all market players, borrowers, and depositors, as well as foreign investors in Egyptian debt instruments.
The third factor in determining the interest rates is the unemployment rate. In Egypt, we found an improvement in the unemployment rate during the third quarter (Q3) of this year, declining by 2.3% to reach 7.3%, compared to 9.6% in Q2.
There is also stability in the exchange rate, remittances, and indirect foreign investment in public debt instruments. In addition, there is a state of optimism that prevails in the world now because the economic and financial effects of COVID-19 started to fade away with the launch of new vaccine against the virus in some countries, according to Abdel-Aal
He added: “In light of this, I believe that the MPC may consider it appropriate to make an interest cut between 50 to 100 basis points, in order to further push economic growth, reduce the internal public debt, and decrease the difference between the interest rates at banks and the rates offered by the CBE in its initiatives.”
Lower interest rates increases attractiveness of local currency
Meanwhile, banking expert Tarek Metwally expected the interest rates to remain unchanged at the MPC’s last meeting this year.
He explained that despite the high inflation, it is still within the CBE’s target for this year.
Metwally affirmed that the CBE has successfully dealt with this file, pointing out that despite the reduction of the interest rate by about 4% during this year, its current level still gives preference to the Egyptian pound at a real and positive interest rate, which increases the attractiveness of the local currency for foreign investment against other currencies, whether at the global level or in emerging markets.
He added that this situation also contributed to increasing foreign investment in government debt instruments and compensating the decline in foreign exchange flows, due to the repercussions of the coronavirus crisis on the local economy.
Metwally pointed out that the success of the monetary policy of the CBE also had a positive impact on stabilising the foreign exchange market and increasing remittances, which in turn increased the country’s international reserves to $39.2bn in November, maintained inflation rates within safe and targeted limits, and kept positive growth rates, unlike negative growth in most world economies.
Inflation to average 4.9% in FY 2020/21
Moreover, Radwa El-Swaify, Head of Research at Pharos Holding, expected the MPC to keep interest rates unchanged on 24 December, after reducing them by 4% over this year.
She also predicted that the inflation rate in Egypt will average 4.9% in fiscal year (FY) 2020/21.
El-Swaify added that the urban inflation rate rose to 0.8% monthly and 5.7% annually in November, compared to 0.2% monthly and 5.1% annually in October, expecting that urban inflation will end FY 2020/21 at an average of 5.0%.
She added that the inflation rate in November exceeded Pharos’ expectations of 0.3% monthly and 5.4% annually for the whole country, and 0.3% monthly and 5.1% annually for urban areas.
El-Swaify indicated that the rise in inflation during November was the result of the food and beverage sector’s growth of 3.2% compared to the previous month, the highest growth since April 2020, after the very weak and sometimes negative growth of the category during 2019 and 2020.
She added that the fluctuation of vegetable prices was responsible for the increase in food prices, as most of the categories remained stable, while the prices of some main vegetables, such as tomatoes, witnessed an increase of 130% compared to the previous month.
