The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its sixth regular meeting this year on Thursday, to determine the basic return rates at CBE, which are the main indicator of the Egyptian pound’s interest rates in the short term.
The MPC decided on 5 September to keep the rates unchanged at 27.25% for deposits, 28.25% for lending, and 27.75% for the main operation, credit, and discount rates, for the third time in a row, as the first time was on 23 May and the second on 18 July.
The MPC said that expectations indicate that inflation will record rates close to the current levels in the fourth quarter of 2024, considering the measures taken and expected to adjust the public finances. Inflation is expected to decline significantly during the first quarter of 2025 due to the cumulative impact of monetary tightening policies and the positive impact of the base period.
At the same time, the MPC believes that the downward path of inflation remains subject to upward risks, including the decline in global oil supplies, the escalation of regional geopolitical tensions, uncertainty about adopting protectionist trade policies, and the possibility that public finance adjustment measures will have an impact that exceeds expectations.
MPC said it will continue closely monitoring economic developments and assessing inflation expectations’ risks. The expected path of basic return rates depends on expected inflation rates rather than prevailing ones. Moreover, MPC will not hesitate to use all available monetary policy tools to enhance the downward path of inflation and achieve price stability in the medium term.
Earlier this month, CBE revealed that the annual core inflation rate slowed slightly in September to 25%, compared to 25.1% in August.
The bank said that the monthly rate of change in the core consumer price index recorded 1% in September 2024, compared to 1.1% in September 2023, and 0.9% in August 2024.
According to expectations from about 12 investment banks, CBE will keep interest rates unchanged during its meeting tomorrow, driven by local factors that feed inflation at this time of the year in particular, including the back-to-school season, and the subsequent increase in the use of transportation in Egypt, amid anticipation of a new increase in fuel prices.
The list of these banks included HC Securities and Investment, EFG Holding, Beltone, Naeem, Zilla Capital, CI Capital, Al-Ahly Pharos, Mubasher Financial, Thunder, Arab African International Securities, Cairo Capital, and Arab Online.
A Reuters poll also showed that CBE is expected to keep its overnight deposit and lending rates unchanged when its MPC meets on Thursday after inflation accelerated over the past two months.
All 16 analysts polled expected the CBE to keep its deposit rate unchanged at 27.25% and its lending rate at 28.25% at the MPC’s regular meeting.
“The rise in inflation over the past two months will support the case for the CBE to keep interest rates on hold this month,” said James Swanston of Capital Economics. “We do not expect a rate cut before the first quarter of 2025 when inflation could slow more sharply.”
The Financial Research Department at HC Securities & Investment expects the CBE’s MPC to keep interest rates unchanged at its meeting on Thursday, given the latest developments in Egypt’s macroeconomic environment and geopolitical turmoil.
Nemat Shukry, Head of Financial Research at the company, said: “Egypt witnessed a significant improvement in its external financial position, reflected in an increase in the balance of payments surplus for the fourth quarter of the fiscal year 23/24 by almost nine times on an annual basis by 22% quarterly to $5.55bn. The Egyptian banking sector also maintained a net foreign currency assets position at $9.73bn in August, but it decreased by $3.54bn monthly shifting from net foreign currency liabilities of the banking sector of $25.9bn at the same time last year. In addition, net foreign exchange reserves increased by $140m in September to $46.737bn compared to $46.597bn in August, as well as a decrease in the value of the one-year credit default swap index in Egypt to 407 basis points from 857 basis points on January 1.”
She continued, “However, economic growth in Egypt remains limited due to high interest rates that affect private sector investments. The Egypt Purchasing Managers’ Index (PMI) for September fell below the 50-point mark to 48.8, after having exceeded it in August, indicating a new decline in the activity of the Egyptian non-oil private sector, as commodity price hikes caused a decline in sales and a slowdown in business activity. As for GDP, it reached 2.4% in the fourth quarter of 23/24, and thus GDP growth by 2.4% for the fiscal year 23/24, down from 3.8% in the fiscal year 22/23, also affected by geopolitical tensions.”
In its efforts to confront these challenges, the government announced investment incentives and a package of tax exemptions to encourage local and foreign private investments to stimulate economic growth. As for inflation, HC expects it to accelerate by 1% monthly to 26.5% YoY in October, due to increases in electricity prices for the household, commercial and industrial sectors in September, and a possible rise in energy prices in October.
The concerned government committee responsible for pricing gasoline and diesel is scheduled to meet in October to discuss gasoline and diesel prices for the fourth quarter of 2024, and the Egyptian Natural Gas Holding Company is studying increasing natural gas prices for the industrial sector by 10%-30% for each industry, due to the high costs of importing natural gas.
As for interest rates, the yield on Egyptian 12-month treasury bills came in at 26.238%, reflecting a real interest rate of 3.00%, after deducting a 15% tax rate for European and US investors and based on her forecast for an average 12-month inflation rate of 19.3%, which is higher than the real interest rate on US 12-month treasury bills at 1.86% but still lower than the real interest rate on Turkish 12-month treasury bills at 17.4%.
Shoukry added that despite the need to cut interest rates to stimulate GDP growth, MPC is expected to postpone this cut until later in the year, due to a forecast of higher inflation in October.
For his part, Mohamed Abdel Aal, a well-known banking expert, believes that MPC will keep interest rates as they are for another session. Abdel Aal pointed out that the MPC meeting is taking place amid local and international economic and geopolitical phenomena and trends almost similar to the conditions that accompanied the committee’s decision to keep interest rates unchanged in previous meetings. He continued that determining the fate of interest in the next meeting requires, as always, an accurate assessment of the new local and global economic and financial factors that could affect the committee’s directions, which is the decision-maker. “In my opinion, there are only two new assumptions that some can base their predictions on in predicting the possibility of a reduction in the interest rate. The first is related to the announcement by the US Federal Reserve and some European banks that they have begun to shift from a restrictive monetary policy to an accommodative one. This suggests that MPC may tend in its next meeting to begin shifting to an accommodative monetary policy that stimulates economic growth. This assumption may not have a direct impact on the committee’s decision at the moment to the difference in the economy, inflation rates, and its targets,” said Abdel Aal. He added, “The second assumption is related to the announcement by both Banque Misr and NBE, the two state-owned banks and CBE arms, a half-percent reduction in the prices of super-premium dollar certificates. Some argue that this reduction is a preemptive signal of MPC’s plan to reduce interest rates on EGP. I believe this assumption also has nothing to do with the committee’s decision, whatever it may be, and that the reasons for the reduction are due to gradually reducing the large gap between the prices of Egyptian dollar certificates and their counterparts, such as US Treasury bonds.”
Abdel Aal pointed out that as a kind of hedging as usual, four factors could influence the trends of future interest rate changes. The first is new and old geopolitical and geographic risks raging in the Middle East region, with the Israeli-Palestinian conflict on the one hand, and Iran and Israel on the other hand. And then there is the Lebanese-Israeli conflict. He added, “If this conflict expands, it will certainly have repercussions on supply lines and thus increase prices.”
The second factor is the IMF’s pressure on Egypt to follow a restrictive monetary and financial policy to confront inflation, with a fourth review round approaching. The third factor is related to the state’s plan to rationalize subsidization and what could result from it in terms of new potential inflationary waves. The fourth factor is the inflation rates recorded now which are still very far from their set targets.
In light of the previous considerations, Abdel Aal believes that despite the global trend in Europe and America to gradually abandon tight monetary policies and the gradual trend towards reducing interest rates, MPC will keep interest rates as they are for another cycle.
