CBE’s interest rate decision: Anticipation of no change

Hossam Mounir
8 Min Read


The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) is poised to convene its third meeting of the year tomorrow to review the central bank’s pivotal interest rates, which dictate short-term borrowing costs for the Egyptian pound.

Following a significant 6% rate increase in an extraordinary session on 6 March, the MPC set the deposit rate at 27.25%, the lending rate at 28.25%, and the main operation and discount rates at 27.75%.

The MPC’s statement underscored the urgency of stringent monetary measures to curb inflation and stabilize monthly rates. It highlighted the necessity of elevated key interest rates to sustain positive real interest rates and manage inflation expectations.

The MPC observed that Egypt’s economy has grappled with foreign currency shortages, giving rise to a parallel exchange market and impeding economic growth. Global economic upheavals have further intensified inflationary pressures and uncertainties, exacerbated by exchange rate fluctuations, commodity price surges, and domestic supply disruptions.

Despite a deceleration in annual inflation, the MPC foresees inflation surpassing the CBE’s target of 7% (± 2%) in Q4 2024.

The committee predicts that dismantling the parallel exchange market will temper inflation expectations and contribute to a medium-term deflationary trend, facilitated by exchange rate consolidation.

Inflation risks are compounded by regional conflicts, commodity market instability, and shifting global financial landscapes. The MPC will transparently communicate any revisions to its inflation objectives.

The MPC contends that the 6% rate hike is instrumental in aligning monetary conditions with the projected inflation reduction pathway, intending to uphold these rates until inflation meets the targeted trajectory.

The CBE recently disclosed a dip in the core consumer price index to 0.3% in April from 1.4% in March, with annual core inflation receding to 31.8% from 33.7%.

The Central Agency for Public Mobilization and Statistics reported a slight decrease in urban annual inflation to 32.5% in April from 33.3% in March, while urban monthly inflation edged up from 1% to 1.1%.

A consensus among 10 leading investment banks, including HC Securities & Investment, EFG Hermes, and others, suggests the MPC will likely retain the current interest rates in the upcoming session.

HC Securities & Investment’s Research Department, reflecting on recent economic indicators, predicts the MPC will sustain the prevailing interest rates in tomorrow’s deliberation.

Heba Mounir, a macroeconomic analyst, remarked: “We expect the MPC to keep the overnight deposit and lending rates unchanged in its upcoming meeting, given the slowdown in annual inflation rates for two consecutive months, despite the monthly increase, and the improvement in foreign currency liquidity following the Ras El Hekma investment deal and Egypt receiving approximately $25bn from the UAE and the IMF. This has contributed to a nearly 19% year-on-year and 1.7% month-on-month increase in net international reserves, reaching $41.1bn in April, and a significant 81% month-on-month and 83% year-on-year reduction in net foreign liabilities of the banking sector to $4.18bn in March.

Furthermore, Egypt’s one-year credit default swap (CDS) index has seen a notable improvement to 287 basis points from 857 basis points on 1 January, coupled with Moody’s upgrading Egypt’s credit outlook to positive from negative and Fitch and Standard & Poor’s to positive from stable.”

Mounir also observed that the decrease in one-year treasury bill rates to 25.98% signifies a real negative return of roughly 6.8%, in contrast to a peak yield of 32.30% in mid-March. The recent decline in treasury yields signals a revival in foreign investor interest, with an estimated $11 to $12bn in inflows from 6 March to 8 April, after the CBE’s decision to let market dynamics set the exchange rate and the finalization of the Ras El Hekma agreement and the continuation of the IMF program.

Banking specialist Mohamed Abdel Aal stated that the forthcoming MPC meeting is set against a backdrop of diverse economic occurrences and trends in Egypt, which pose both opportunities and challenges. As a result, the decision on the interest rate is a nuanced and intricate matter, necessitating careful analysis of both domestic and international economic and financial dynamics.

Abdel Aal elucidated that, as per the MPC’s latest pronouncements, their main concern is inflation. Therefore, the governance and mitigation of economic inflation will persist as the principal determinant of prospective interest rate modifications in the medium term. Grasping the influence of inflation on interest rate fluctuations is essential for anticipating the monetary policy trajectory in Egypt.

“In my opinion, several pivotal factors indicate that the MPC might opt to sustain the current interest rates. Even though inflation rates are decelerating, both the general and core inflation rates are still considerably higher than the target figures,” Abdel Aal articulated.

He emphasized that both monetary and fiscal strategies necessitate substantial time to exert influence on inflation. Following the exchange rate liberalization on 6 March, which was accompanied by an extraordinary 600 basis point surge in interest rates, along with a prior 200 basis point increment, culminating in an 800 basis point elevation by the end of Q1, it is sensible to give these initiatives time to temper demand and diminish the costs of goods and production elements.

Abdel Aal pointed out that, at the onset of May, the central bank intensified its efforts to retract surplus liquidity from banks and altered the weekly deposit acceptance protocol from allocation to complete acceptance, absorbing roughly one trillion pounds in a single day at a yield surpassing the average net yield on treasury bills.

This manoeuvre underscores the central bank’s resolve to eradicate any surplus liquidity that might intensify consumer demand or engender unwarranted demand for foreign currency, signifying a present emphasis on employing instruments other than interest rates.

“There is enhanced synergy between monetary and fiscal policies, exemplified by the prohibition of government entities, except for the Ministry of Finance, from securing loans from the central bank. This translates to a curtailment of certain forms of public expenditure and inflationary funding,” Abdel Aal commented.

He further noted that, despite the global economic landscape being marked by subdued growth rates and diminishing inflationary pressures due to stringent monetary policies enacted by worldwide central banks and reduced inflation forecasts, the apprehension of rekindled inflationary forces has prompted central banks in the US and Europe to persist with their vigilant restrictive measures for a prolonged duration. This scenario may compel Egypt to maintain a contractionary monetary stance to curb inflation.

Considering these elements, Abdel Aal conjectures that the MPC is inclined to maintain the status quo regarding interest rates.


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