The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its first meeting in 2023 to discuss the fate of the basic interest rates on Thursday, which are the most prominent indicator of the direction of local interest rates in the short term.
The committee held 8 meetings during 2022, during which interest rates on the Egyptian 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, which came accompanying a decision to follow a flexible exchange rate, and finally the 3% that it approved on 22 December 2022.
In the new year, the committee will also hold 8 meetings, the first of which will be tomorrow, 2 February, then 30 March, 18 May, 22 June, then 3 August, 21 September, then 2 November, and finally 21 December.
In its last meeting, the Monetary Policy Committee decided to raise the basic return rates at the Central Bank 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 committee affirmed that the course of basic interest rates with the Central Bank depends on the expected inflation rates and not the prevailing ones, pointing out that it will continue to strive towards achieving the goal of price stability.
Earlier in January, the Central Bank of Egypt revealed that the annual core inflation rate, prepared by it, had risen 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 2022, compared to 2.7% in November 2022 and 0.2% in December 2021.
The Central Agency for Public Mobilization and Statistics also 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 December 2021.
The Central Bank of Egypt 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 said, in a statement a few days ago, that it had agreed with the Central Bank of Egypt on a further policy of monetary tightening, against the backdrop of the ongoing inflationary pressures due to the depreciation of the pound.
Mohamed El Bey, a banking expert, expects the monetary policy committee of the Central Bank of Egypt to raise the basic interest rates at the Central Bank by 2-3% during its Thursday meeting.
He explained that this expectation comes against the backdrop of the monetary policymakers’ attempt to contain inflationary pressures, as the change in exchange rates was reflected in the prices of goods and services in the markets, and thus on the levels of general inflation and core inflation during the period from September to December 2022 an upward curve to the level of 20% and 21%, which gives the central bank more room to raise its interest rates to align with the yield curve on treasury bills.
He expected the prices of petroleum products will witness partial increases during the coming period, reflecting the rise in global prices, according to the government’s program with the International Monetary Fund, which may increase the pace of inflationary pressures.
He explained that withdrawing liquidity in those circumstances by raising interest rates may be most appropriate for the economy, as it works to reduce the money supply by rationalizing borrowing decisions due to the high-interest rates in debt, as well as encouraging saving due to the high-interest rates on the other side as well, which works to rebalance the prices of goods and services by reducing demand for them.
He indicated that with regard to the target interest rate by the US Federal Reserve, the target range for the benchmark interest rate increased from 4.25% to 4.5%, which is the highest rate in 15 years, in order to confront the high inflation rates, which reached their highest levels in more than 40 years.
He added that within the framework of the government and the Central Bank of Egypt’s endeavour to restore attracting foreign investments in government debt instruments steadily, with the aim of increasing the flow of foreign currency into the arteries of the official economy, the Monetary Policy Committee may resort to raising interest rates to pave the way for raising the rates of return on government debt instruments, which It makes it more attractive to the foreign investor.
He believes that raising interest rates will be an important factor in achieving a positive real interest rate to exceed current inflation rates and expected rates during the medium term, which contributes positively to increasing foreign investments in Egyptian debt instruments.
In this context, he believes that the Monetary Policy Committee may tend to raise the current interest rates by 200 to 300 basis points while monitoring the movements of global financial markets, in addition to following up on the flow of foreign investments that were announced during the last period, which are the main factors that affect prices, foreign currency exchange and flow.
HSBC expected the central bank to raise the basic interest rate on the Egyptian pound by 2% at Thursday’s Monetary Policy Committee meeting.
The bank attributed this expectation to inflation expectations, which reached the highest level in 4 years at 21.3% in December 2022, and its expectations that it will continue to rise to about 25% in the first quarter of 2023, which is about 15% more than the maximum targets of the Central Bank.
HSBC confirmed that the rise in interest will give some support to the pound, which has lost more than half of its value.
“We expect the Central Bank of Egypt’s Monetary Policy Committee to keep interest rates unchanged to allow the market to absorb a 300 basis point interest rate hike,” said Heba Mounir, banking and macroeconomics analyst at HC Securities.
“We expect inflation to accelerate to 23.5% in July 2023 before declining to 18.2% in December 2023, with an average of 21.5% during 2023, and we expect the average return of treasury bills for the year to be about 20.6% in 2023, with a tax rate of 15% for US and European investors, taking into account our expectations of a 200 basis point rate hike for the rest of the year,” she added.
The Research Department of the Financial Group Hermes expected that the Monetary Policy Committee of the Central Bank of Egypt would raise the basic interest rates by 1.5% during its meeting next Thursday.
Hermes attributed this to containing inflationary pressures arising from the recent decline in the value of the Egyptian pound against the dollar, as the value of the pound fell by approximately 17% during the last three weeks of January.
Hermes expected an increase in inflation to about 23% during the current month of January, compared to 21.3% in December 2022, provided that it will continue near those levels during the first quarter of 2023.