The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its sixth periodic meeting this year to discuss the fate of interest rates on Thursday.
This comes amid strong expectations on the part of experts that MPC will maintain rates unchanged for the seventh time in a row.
MPC decided, on 5 August, to maintain the basic interest rates with CBE, at 8.25% for deposit, 9.25% for lending, and 8.75% for the credit and discount rate as well as the main operation at the Central Bank. These rates remain the same from November 2019.
MPC said, in a statement then, that it considered the current basic interest rates as the most appropriate at the present time, in line with the target inflation rate of 7% (±2) on average during the fourth quarter (Q4) of 2022.
Earlier this month, CBE announced that the monthly core inflation computed by the Bank recorded about -0.3% in August 2021, compared to 0.2% in August 2020, and 0.6% in July 2021.
CBE said the annual core inflation recorded 4.5% in August 2021, compared to 4.6% in July.
Meanwhile, the Central Agency for Public Mobilization and Statistics (CAPMAS) stated that the annual urban inflation rose to 5.7% in August 2021, compared to 5.4% in July. On a monthly basis, inflation slowed to 0.1% in August from 0.9% in July.
Banking expert Mohamed Abdel Aal said, “In my opinion, MPC may keep interest rates unchanged on Thursday for the seventh time in a row, which means that the existing interest rate levels are still consistent and balanced with most major economic indicators.”
He explained that despite the slight fluctuations in inflation rates, and despite its upward trend, it is expected that it will remain limited in rise, to record a single digit, stable at the limits targeted by CBE, which is 7% (±2%) until the end of Q4 of 2022. Therefore, any interest rate adjustment at the current time may be unjustified, he said.
Abel Aal added that the current or expected inflation figures, compared to the average yield curve on the Egyptian pound, still indicate a very reasonable real return difference, which would have allowed MPC to make a new interest rate cut, but it might prefer to continue at the current level, in support of savings the household sector, in a way that guarantees a stable income that helps create a derivative demand for goods and services. Keeping rates unchanged would also attract the remittances of Egyptians working abroad, and preserve the flow of indirect foreign investment in government public debt securities.
“On the other hand, I think that one of the reasons for fixing the interest is to hedge against any possible risks of recession in some activities as a result of the decline in consumer demand, especially after the noticeable improvement in the Purchasing Managers Index during August, which scored 49.8 points compared to 49.1 point in July, which means that the current interest rate has succeeded in contributing to the general economic recovery, and helped in the growth of domestic demand and the record expansion in the non-oil private sector activity,” said Abdel Aal.
The Research Department at HC Securities and Investment also expected that CBE would keep the interest rate unchanged at its meeting on Thursday.
Monet Doss, Senior Analyst for the Macroeconomics and Financial Services Sector at HC, said that the inflation rate in Egypt is still closer to the minimum target of CBE, which is 7% (±2%) for Q4 of 2022, expecting that the average inflation will reach 5.6% in Q4 of 2021.
Moreover, Radwa El-Swaify, Head of Research at Pharos Holding, expected that interest rates would be fixed on Thursday, given the relatively high inflation in August.
Al-Swaify explained that there is no inflationary pressure in the market, and inflation is expected to decline by the end of the year, reaching around 5%, within the CBE’s target range of 7% (±2%).
She said that in light of the fact that some countries raised interest rates, Egypt’s lowering of the rates became unlikely to maintain its competitive position in relation to foreign investment portfolios, and therefore it will want to maintain this by fixing the interest.
In addition, the Research Department at Beltone Financial expected CBE to keep interest rates unchanged on Thursday, in light of the need to maintain the attractiveness of investment in the fixed income market, especially with the rise in interest rates globally, which puts pressure on flows to emerging markets.
It added that the annual inflation for Egypt witnessed a slight increase to 5.7% in August, compared to 5.4% in July; however, it is still lower than the previous year.
It continued that the inflation witnessed a rise of 0.1% on a monthly basis, compared to an increase of 0.9% in July, expecting an increase in the annual inflation in the second half of 2021, with the start of the rise in global prices of commodities gradually reflecting on the local market, in addition to the impact of the comparison periods.