CBE to decide fate of EGP interest rate amid strong expectations of new rise

Hossam Mounir
10 Min Read

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its second periodic meeting in the current year to discuss the fate of the basic interest rates at the Central Bank, which are the most prominent indicator of the Egyptian pound’s interest rates in the short term.

The committee had decided, in its meeting held on 2 February, to keep those rates at 16.25% for deposits, 17.25% for lending, and 16.75% for the credit and discount rate and the price of the main operation with the Central Bank, after raising them by 8% during the year 2022, of which 5 are % in the last quarter of the year.

The committee said, in its statement accompanying this decision, that the decision aims to assess the impact of the proactive increases made by the Central Bank during the year 2022, amounting to 8%, on inflation.

It pointed to the persistence of inflationary pressures on the demand side, which was reflected in the development of real economic activity compared to its maximum production capacity and the impact of recent exchange rate fluctuations, pointing out that these developments are consistent with the rise in the domestic liquidity growth rate.

The committee clarified that to counter inflationary pressures, it had proactively raised the basic interest rates at the Central Bank by 800 basis points during 2022, including 500 basis points during the fourth quarter of the year, and it also increased the percentage of cash reserves that banks are obligated to keep with the Central Bank by 400 basis points in September 2022.

The committee believes that the CBE’s proactive policy aims to control inflationary pressures and reduce inflation expectations to the target level of 7% ± 2% on average during the fourth quarter of 2024.

The Committee indicated that the course of basic interest rates depends on expected inflation rates and not the prevailing inflation rates, stressing that restricting monetary conditions is a prerequisite for achieving targeted inflation rates and the goal of price stability in the medium term.

The Central Bank revealed, earlier this month, that the annual core inflation rate had risen to 40.3% in February 2023, compared to 31.2% in January 2023, marking the highest level in its history.

The monthly core inflation rate recorded 8.1% in February 2023, compared to 6.3% in January 2023, and 1.2% in February 2022.

The Central Agency for Public Mobilization and Statistics also revealed that the annual inflation rate in Egyptian cities rose to 31.9% in February, compared to 25.8% in January, and on a monthly basis, inflation reached 6.5% compared to 4.7%.

According to Mohamed Abdel-Aal, a well-known banking expert, in light of the escalation of the inflation rate to these unprecedented levels, it is expected that the Egyptian monetary authorities will continue to pursue a very tight monetary policy, whether it is gradual or at a rapid pace.

“Within the scope of personal expectation, we can see a new interest rate hike by about 200 to 300 basis points, and there may be scope, in a next or accompanying step, to raise the compulsory reserve ratio of the Egyptian pound to 20%, in light of what is expected of the continuation of some pressures on the Egyptian pound, which means that the inflation rate will continue to rise in the current month of March, especially under the influence of the rise in fuel prices and the inflationary pressures accompanying the month of Ramadan, as well as the impact of the wage hike package,” he added.

Abdel Aal indicated that if this happens, it will give the green light to some banks to offer a new savings certificate with very distinct interest rates, to absorb the excess liquidity of the new or renewed family sector from the due certificates.

Despite his expectations, Mohamed Abdel-Aal believes that focusing on the policy of raising interest more than it is now may not be beneficial at the macroeconomic level, in both its monetary and financial aspects, pointing out that “our conditions and problems in Egypt are different from the conditions and problems of other countries that fight inflation by raising inflation.”

Abdel Aal said: “Continuing with what the Monetary Policy Committee adopted in its previous meeting, fixing interest, is, in my opinion, the best solution.”

He pointed out that raising interest and making new deposits at high prices, the net income of which will inevitably be negative, is illogical, and will not achieve the interests of the country or the citizens in the short and medium term.

He added: “I hope that the interest will be fixed for another period, and that the certificates that have begun to mature will return to the various savings vessels that currently exist in all banks spread across the land of Egypt, and all of them are at reasonable and distinct prices, and there is no logical justification for issuing new savings certificates, and with the gradual decline in inflation, we will reach a fair and positive rate of return that guarantees real income for the saver and the investor.”

According to Abdel-Al, it is not true that raising interest makes the national currency more attractive to indirect foreign investment in public debt securities, and helps to resist the phenomenon of dollarization, explaining that this may be possible in normal global economic conditions, but in light of the state of anxiety and turmoil that currently prevails in the world, it may push investors to other safe haven assets, no matter how high interest rates are.

Heba Mounir, a macroeconomic analyst at HC Securities and Investment, expected that the MPC would continue its tightening policy, and raise interest rates by 200 basis points at its meeting scheduled for Thursday, with the aim of controlling the increasing inflation rates, which is expected. It should continue to rise, peaking at 35.9% by July 2023, before gradually declining to 30.3% by December.

According to Mounir, it is expected that the inflation figures for March and the coming months will reflect an increase in gasoline prices by rates ranging from 7 to 11% in early March and an increase in the prices of heavy fuel oil, diesel by 20% for all industries except for the food and electricity generation sectors, the expected increase in household electricity as of 1 July, along with the recent liberation of some basic food commodities such as rice, and the shortage in domestic poultry supplies due to problems related to feed prices and availability, which were affected by the Russian-Ukrainian war. In addition, the value of the Egyptian pound has declined by 20% since the beginning of the year until now.

She added that in light of the increase in inflationary pressures, and Egypt’s need to maintain investment attractiveness, it is expected that the rate of return required by investors on Egyptian treasury bills for the 12-month term will reach 25.18%, which reflects the rise in the credit default swap for Egypt for a period of one year to 1419 compared to its level at 670 at the beginning of last February.

According to Mounir, the last issuance of treasury bills for a period of 12 months recorded an average return of 19.19%, after deducting taxes of 15% for foreign investors, which reflects a real return of negative 2.31%, taking into account inflation expectations of 21.5% in March 2024, which reinforces the view on the expected increase in interest rates.

A Reuters poll showed that the Central Bank of Egypt is expected to raise overnight interest rates by 2% at its meeting tomorrow, as it struggles to control soaring inflation.

The average expectation in the poll, which included 15 analysts, was that the Central Bank would raise the interest rate on deposits to 18.25% and the lending rate to 19.25%, while 7 analysts expected an increase of 3%.

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