The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its first meeting in 2023 next Thursday to discuss the fate of the basic interest rates, which are the most prominent indicator of the direction of interest rates on the Egyptian pound in the short term.
The CBE had previously revealed the dates of the MPC’s eight meetings in the year, which will be on 2 February, 30 March, 18 May, 22 June, then 3 August and 21 September, then 2 November, and the last on 21 December.
The committee had held eight meetings in 2022, during which interest rates on the pound were increased by about 8%, including 1% on 21 March, 2% on 19 May, and 2% during the extraordinary meeting it held on 27 October, and finally the flexible exchange rate it approved on 22 December 2022.
In its last meeting, the MPC decided to increase the basic return rates at CBE by 3%, to reach 16.25% for deposits, 17.25% for lending, and 16.75% for the credit and discount rate and the price of the main operation at the Central Bank.
The MPC said that the future path of inflation rates depends on the cumulative increases in interest rates to date, which takes time to affect inflation rates. It stressed that it is closely following global and local economic developments, and that it will continue to use all its monetary tools in order to control inflation and contain inflationary pressures.
Earlier this month, the CBE revealed that the annual core inflation rate increased to 24.4% in December 2022, compared to 21.5% in November 2022.
The CBE stated that the monthly rate of core inflation recorded 2.6% in December, compared to 2.7% in November 2022 and 0.2% in December 2021.
The Central Agency for Public Mobilization and Statistics (CAPMAS) revealed that the annual inflation rate in cities increased to 21.3% in December 2022, compared to 18.7% in the previous November. The annual inflation rate for the entire republic was 21.9% in December 2022 compared to 19.2% in November 2022, and 6.5% in November 2022. December 2021.
The CBE had set new targets for inflation at 7% (±2%) during the last quarter of 2024 and 5% (±2%) in the last quarter of 2026.
The International Monetary Fund (IMF) said, in a statement a few days ago, that it was agreed with CBE to do further policy of monetary tightening, with ongoing inflationary pressures due to the depreciation of the pound. The Fund expected core inflation to decline to 7% by the fiscal year 2024/2025.
The poll conducted by Reuters, between 9 and 24 January, and included 18 economists, predicted that the annual urban consumer price inflation rate would rise to 13.4% in the 2022-2023 fiscal year and 16.6% in the following year, before settling at 8.8% in the previous fiscal year 2024-2025. This would bring the rate back to the central bank’s target range of 5% to 9%.
According to the survey, with inflation exceeding 21% in December 2022, the CBE may have to raise interest rates further to attract more foreign investment, according to Matthew Vogel, portfolio manager and head of sovereign research at FIM Partners.
“With inflation rising to close to 30% in the coming months, and no fulcrum in the currency market given the change in regime, we still believe that the CBE should continue to tighten,” Vogel said.
Hany Hafez, a banking expert, believes that the CBE seeks, through raising interest and using monetary policy tools, to contain the effects of inflation and preserve the savings of the household sector in the banking sector, in addition to creating an incentive for Egyptians to invest in a safe savings vessel with a fixed return that does not involve risks of price changes and speculation. It would then plan to eliminate the so-called dollarization in the black market, especially with the movement witnessed by the price of foreign currencies against the Egyptian pound, which works to give a better investment to customers away from risk.
The Reuters poll predicted a decline in the rate of return on overnight lending at the CBE, which currently stands at 17.25%, to 15% by the end of June 2023, before falling again to 9.75% by June 2026.