CAIRO: The Central Bank of Egypt raised Monday its key overnight interest rates for the second time in less than two months on the back of rising food prices and inflationary pressure from economic growth.
The bank’s Monetary Policy Committee (MPC) agreed to lift the overnight deposit rate by 50 basis points to 9.5 percent and lending rate to 11.5 percent.
It last raised the rates on Feb. 10, its first change in over a year.
“That move was expected because inflation rates are going up. Therefore, it was only [logical] for the central bank to raise interest rates, explained Reem Mansour, senior economist at HC Securities brokerage firm.
The central bank said in a statement that the consumer price index “jumped to 10.5 percent in January and further accelerated to 12.1 percent in February, exceeding the central bank’s comfort zone.
“High international food prices are likely to continue exerting upward pressure on domestic food inflation, triggering further spillovers to non-food inflation. Moreover, despite downward revisions to the global economic growth outlook, domestic growth is expected to maintain momentum, precipitating inflationary pressures, the bank said.
“Having considered the above, the MPC assesses that the balance of risks to the inflation outlook continue to be on the upside and today’s decision aims at containing inflation expectations.
It is not immediately clear, Manosur pointed out, what the direct impact of this hike would be. “The time span between the central bank’s action and impact on the economy is unknown. That’s why, you can’t say that a raise in interest rates will see a direct impact on inflation and on the economy, she added.
The central bank s overnight rates are its main elements to increase savings and bank deposits. While banks did not respond to the previous interest rates rise, it remains to be seen whether or not they will respond this time. “I am not sure how banks will react, Mansour commented.
Three-month deposit rates still hover in the range of 5.25-6.75 percent.
“Banks first want the central bank to raise interbank and treasury rates before they raise their deposit rates [to balance their operations], Reham El Desoki, senior economist at Beltone Financial, previously told Daily News Egypt. Recent data shows that overnight interbank rates on the Egyptian pound were 9.002 percent on March 19.
However, Reuters reported that bankers said most banks would respond at once or within days by adjusting their rates for customers by the same amount. “Bankers said the two overnight rates remain below inflation and said the central bank would probably have to raise rates again by 25 or 50 basis points at its next meeting in six weeks time, the news agency said.
On the other hand, rate hikes negatively impact companies’ stock valuations. “The rise in the corridor rates will raise the discount rate used to value companies in discounted cash flow models and thus reduce company valuations, stated HC Securities. “On average every 50 basis points rise in interest rates reduces corporate valuations by around five percent . with more levered stocks losing more in value.
