Egypt’s interest rates expected to remain unchanged for 5th consecutive CBE meeting

Hossam Mounir
8 Min Read
The Central Bank of Egypt (CBE) has said that portfolio investment flows directed to emerging markets (EMs) will witness a slow and uneven recovery in favour of regions with the strongest economic recovery.

Banking experts and analysts are expecting interest rates to remain unchanged at the Central Bank of Egypt (CBE) for the fifth consecutive time, on the back of the Monetary Policy Committee’s (MPC) meeting on Thursday.

At its meeting on 28 April, the MPC decided to maintain basic interest rates at 8.25% for deposits, 9.25% for lending, and 8.75% for the credit and discount rate and the price of the main operation at the CBE. These levels have remained stable since November 2019.

Banking expert Mohamed Abdel Aal said that the CBE’s monetary policy is based on adopting a long-term stimulus policy in line with the state’s policy of stimulating economic growth and supporting all activities affecting production.

He pointed out that despite the rise in the core inflation rate in May, the real interest rate is still high, giving the MPC the green light for the possible reduction in the interest rate. On the other hand, however, the committee may give more attention to the importance of maintaining foreign exchange (FX) flows from all sources, which makes it prefer to keep interest rates fixed.

Abdel Aal added that the inflation rate expectations in the coming months will be one of the most important factors affecting interest rate trends. This comes as the expected inflation rate trends in the coming months indicate its stability at a single digit, placing it within the CBE’s target rate at 7% (±2%).

He said that there are indicators that may suggest the MPC’s direction at its next meeting to stabilise interest rates, to avoid any manifestations of economic stagnation. It will also reflect a need to pay attention to stimulating consumption by granting appropriate interest rates to the household sector.

This is in addition to working to continue the attractiveness of the Egyptian pound to Egyptian workers abroad and investors in public debt securities. There will also be a continued use of other monetary easing tools through procedural initiatives and facilities as a temporary alternative if it is required.

These efforts will inject greater liquidity into the economy without the need for a policy of reducing interest and waiting for the extrapolation of the development of global and local indicators.

Banking expert Tarek Metwally expects that the Monetary Policy Committee (MPC) will move to stabilise interest rates at its meeting on Thursday. He pointed out that despite the slight rise in inflation, it is still within the CBE’s target limits of between 5-9%.

He referred to the global developments regarding the novel coronavirus (COVID-19) crisis, which recently led to an increase in the interest rates on US Treasury bills (T-bills). This occurred to attract more investments to the US market, which will have an impact on emerging markets and on attracting foreign investments in Egyptian government debt instruments.

These debt instruments are one of the current important sources in bridging the gap in foreign exchange, financing the current account deficit, and the stability of the exchange rate, which promotes maintaining interest rates at the same levels.

Metwally said that the rise in oil prices and basic commodities abroad, the stability of the exchange rate, and the continued attractiveness of the Egyptian pound for foreign investment in government debt instruments is one of the main factors that the CBE puts before it when making its decisions regarding interest rates.

For her part, Radwa El-Swaify, Head of the Research Sector at Pharos Holding, expects the CBE to maintain interest rates unchanged until at least October 2021.

El-Swaify attributed this to the fact that inflation began to rise gradually starting from May, and is likely to continue gradually rising until September 2021. This is due to the impact of the base year on the numbers, the increase in global commodity prices, the rise in the prices of raw materials, and the increase in the prices of fruits and vegetables in the summer season.

She indicated that urban inflation may rise gradually from 4.1% on an annual basis in April, to about 5.5% in September.

El-Swaify added that Egypt still needs to maintain its competitiveness as a destination for foreign portfolio investments in light of the slow spread of the COVID-19 vaccine, which has slowed the recovery of global tourism. It also takes into account the economic recovery in the developed world, which leads it to maintain interest rates at least until the fourth quarter (Q4) of 2021.

The Research Department at Beltone Financial expects the CBE to keep interest rates unchanged during the upcoming MPC meeting on 17 June.

The investment bank attributed this to the need to maintain the attractiveness of investment in the fixed income market, especially with rising interest rates globally, which put pressure on flows to emerging markets.

Beltone also expects an increase in the annual general inflation reading during the second half (H2) of 2021, with the start of a gradual rise in international commodity prices, in addition to the impact of the comparison periods.

For its part, the Research Department of HC Securities and Investment expects that the CBE will keep the interest rate unchanged at its next meeting scheduled for Thursday.

Monette Doss, the company’s senior macroeconomic and financial services analyst, said the May inflation figures came in slightly better than the forecasts of 5.0% on an annual basis and 0.8% on a monthly basis.

“During the remainder of 2021, we expect the average inflation rate to be 0.8% on a monthly basis, and 6.8% on an annual basis, which reflects the rise in commodity prices globally and the possibility of a recovery in the tourism sector and consumer spending after the launch of the coronavirus vaccine,” she said, “Therefore, we expect the inflation rate in 2021 to remain within the CBE’s target range of 7% (±2%) for Q4 of 2022.”

Doss believes that at this point a rate cut could increase the difference between the official interest rate and government Treasury bill yields, which are expected to remain high.

She added that it is possible to reduce the interest rate by 100 basis points in H2 of 2021 after the resumption of tourism activity and a possible recovery in international trade. 

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