Egyptian market awaits CBE’s decision on interest rates after latest move by US Federal Reserve

Hossam Mounir
7 Min Read

The market is awaiting the Central Bank of Egypt’s (CBE) decision regarding interest rates on the EGP after the US Federal Reserve raised its interest rates by 75 basis points last Wednesday.

The Monetary Policy Committee (MPC) of the CBE will hold its periodic meeting on 18 August to discuss the future of the EGP’s basic interest rates in the short term.

The committee decided in its last meeting on 23 June to fix the rates at 11.25% for deposits, 12.25% for lending, and 11.75% for the credit and discount rate and the price of the main transaction in CBE. This came after the MPC raised those rates by 3% in their March and May meetings of last year.

A report issued by Fitch speculates that the MPC will resort to raising interest rates by about 3% throughout its remaining meetings in 2022, especially with the decline in local economic activity.

It explained that the repercussions of the Russian-Ukrainian War on the Egyptian and global economy are profound and have led to high inflation rates as well as a slowdown in the tourism sector after it had barely recovered from the coronavirus crisis.

Fitch also indicated that raising the interest rates would increase borrowing costs and encourage some to save instead of investing, however, the institution believes that the increase in foreign investments as a result of raising interest rates will offset some of the negative effects on the economic sector.

In a report by BNP Paribas, researchers expected the CBE to raise its interest rates by at least 1% in each of its remaining meetings in August and November, expecting inflation to rise again and reach a peak of 17.7% in October.

Last Wednesday, the US Federal Reserve’s Open Market Committee decided to raise interest rates by 75 basis points for the second time in a row to reach 2.25% – 2.5%. This is part of a fiscal tightening policy approach that the US Central Bank is pursuing to confront inflation rates that reached their highest levels in more than 40 years.

The US Federal Reserve raised interest rates three times throughout 2022 so far, which has been met by consistent reactions from most Arab central banks, as the CBE raised its interest rates by 300 basis points since the beginning of this year, while the UAE’s Central Bank raised them by 150. The same applies to the Central Bank of Bahrain, while Jordan and Saudi Arabia raised their interest rates by 125 basis points each.

Some of the central banks in the Gulf Cooperation Council’s (GCC) countries followed the US Federal Reserve’s decision to raise interest rates by 0.75% as well.

The Qatari Central Bank also decided to raise its lending interest rate by 50 basis points and raise the deposit interest rate by 75.

The Central Bank of Bahrain said in a statement that it has decided to raise the basic interest rate on deposits for a month as well as one week by 75 basis points to 4%, and to raise the lending interest rate by 75 basis points to 4.50%.

Moreover, the Central Bank of the UAE also decided to raise its basic interest rate by 75 basis points.

Meanwhile, the Saudi Central Bank said it increased its key interest rates by 75 basis points.

It also raised the rate of repurchase agreements (Repo) and the rate of reverse repurchase agreements (reverse repo) by 75 basis points to 3% and 2.5%, respectively.

The Central Bank of Kuwait was the least in raising the interest rate, as the Kuwaiti Dinar is linked to a basket of foreign currencies and not only the dollar, however, it decided to raise the discount rate by a quarter of a percentage point to reach 2.50%.

Chairperson of the US Federal Reserve Jerome Powel said the US Central Bank would do whatever is needed to control price hikes and keep inflation targets around 2%.

Powell added in a press conference following the decision to increase the interest rates that the Open Market Committee will not hesitate to continue raising interest rates whenever necessary, which depends on the economic data that will be announced during the coming period that involves inflation, employment. and consumer spending.

Inflation in the US in June rose 9.1% y-o-y, topping estimates of 8.8%, the fastest rising rate since December 1981.

Powell explained that the plan to increase interest rates during the next stage will be drawn up for each meeting separately after the violent hikes approved by the Central Bank since the beginning of the year, as it is not unlikely for interest rates to be significantly increased if necessary.

The US’ GDP contracted in the first quarter (1Q) of 2022 as a result of historically high prices, leading the Fed to violently tighten fiscal policy to counter inflation, and indicators that track economic activity say that the GDP will contract again in 2Q when data is released on 28 July.

Powell emphasised that the central bank would continue to raise interest rates to tame inflation and acknowledged that a recession in the US was possible.

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