The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its first periodic meeting in 2022 to discuss the fate of the base rates on Thursday, which are the main indicator of the direction of the Egyptian pound’s interest in the short term.
The committee had decided during its last meeting in 2021 — which was held on 16 December — to keep the rates fixed for the ninth time in a row, keeping the rates 8.25% for depositing, 9.25% for lending, and 8.75% for the credit and discount rate and the price of the main operation of the CBE.
These rates have remained unchanged since November 2019.
The MPC said in its previous statement that it believes the basic interest rates at the CBE are appropriate at the present time and consistent with achieving the target inflation rate of 7% (± 2 percentage points) on average during the fourth quarter (4Q) of 2022 and stabilising prices on the medium-term.
The CBE and the Central Agency for Public Mobilisation and Statistics (CAPMAS) revealed the latest developments in the inflation rate on the tenth day of every month, which falls this month on the Thursday after the MPC meeting.
In 2022, the committee is scheduled to meet on 3 February, 24 March, 19 May, 23 June, 18 August, 22 September, 3 November, and 22 December.
“In my opinion, the MPC will move in its meeting tomorrow to keep interest rates unchanged for the tenth time in a row, which means that the existing interest rate levels are still consistent and balanced with most major domestic and global economic indicators,” said Mohamed Abdel Aal, a well-known banking expert.
Abdel Aal explained that despite the upward trend of both headline and core inflation rates, they still remained below the target range of the CBE of 7% ± 2% until the end of the fourth quarter of 2022, indicating that the current inflation figures — compared to the average return curve on the pound — still indicate a very reasonable positive real return difference, which would have allowed the MPC to make a new reduction.
However, it prefers to continue at the current level of interest rates in support of the savings of the family sector and to provide distinct returns on their savings in a way that guarantees them a stable income that helps create a derivative demand for goods and services as well as attract remittances from Egyptians working abroad and to maintain the flow of indirect foreign investment in government public debt securities.
He pointed out that specialised international institutions confirmed that inflation rates in Egypt are under control despite the global inflation wave, and this is mainly due to the rational monetary policy pursued by the CBE on the one hand and also the set of precautionary and proactive measures taken by the government and the bank, which succeeded to an extent to contain the imported inflationary price waves.
Abdel Aal added that the US Federal Reserve keeping interest rates as they are has greatly eased the concern of some observers about the emergence of immediate repercussions on foreign indirect investments in government public debt securities or on the strength of the Egyptian pound, although talking about this effect was originally exaggerated to a large extent, because the diversification of foreign exchange sources, the stability of the value of the pound, and the stability of the inflation rate below the target limit all represent a hot fence in the face of these concerns in the short and medium terms and Egypt’s tendency to adopt a strategy to turn to sources of long-term loans as an alternative to hot money.
Furthermore, the entry of government bonds to the JP Morgan platform and the state’s intention to issue green bonds in the international bond market will help attract new long-term investments that can compensate for the exit of short-term foreign investments in local public debt securities if they come out with the impact of the rise in US interest in the future.
Abdel Aal stressed that any interest rate hike or cut at the CBE meeting tomorrow may be out of time because the CBE aims to follow a monetary policy to balance the effects of inflation after it has completed controlling it, and raising interest — while we are still in the fourth wave of the pandemic — may lead to a reduction in economic recovery and growth, and a reduction in interest may lead to a contraction in the aggregate demand for goods and services as a result of a decrease in the purchasing power of savers from the family sector, and may negatively affect the volume and value of foreign indirect investment.
Moreover, the Research Department of HC Securities and Investment expected that the CBE would keep the interest rates unchanged in its upcoming meeting.
Monette Doss, the Senior Analyst for the Macroeconomics and Financial Services Sector at the company, said that inflation rates in Egypt are still under control near the minimum target of the CBE for 4Q of 2022, and she expects the inflation rate to reach 7.0% in 1Q of 2022.
She believes that foreign flows in government debt instruments are still a major supporter of the Egyptian net foreign reserves, pointing out that at the present time, Egyptian debt instruments provide a real return of 4%, compared to the fact that American debt instruments for the two years are expected to provide a negative real return of – 2.2%, according to Bloomberg estimates for 2022.
Al-Ahly Pharos also expected that the CBE will keep the interest rates unchanged at its meeting next Thursday despite the increase in the global inflation pace.
It added that the MPC is fully aware of the fundamental factors that require the stability of borrowing cost levels for the longest possible period, indicating that inflation readings are still within the target range and explaining that the CBE is not in a hurry to decide to raise interest rates without a reason to do so, and raising interest rates may be more urgent at some time this year, with potential financial measures to be taken as a kind of response to developments in the global scene.
