The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is due to hold its first meeting of 2018 to discuss the fate of the interest rate on the pound, which is the most important indicator of the rates in the market on the short term.
That meeting will be on 15 February. The committee is set to hold seven more meetings this year (eight in total) this year. The following meetings are scheduled for 29 March, 17 May, 28 June, 16 August, 27 September, 15 November, and 27 December.
Between 3 November 2016 and 6 July 2017, the CBE raised its benchmark interest rate by 7%; by 3% on 3 November, 2% on 21 May, and 2% on 6 July. These moves aimed to curb high inflation, which hiked following the decisions to float the pound and lift subsidies on some commodities.
The CBE currently has an 18.75% overnight deposit rate, 19.75% overnight lending rate, 19.25% discount rate, and a 19.25% rate for its main operations.
In the last months of 2017, inflation rates started to decline. This trend continued in January 2018, amid expectations of a further decline.
On Thursday, the CBE said that monthly inflation recorded 0.06% at the end of January 2018, against 0.21% in December 2017. Annual inflation was at 17.97% in January, against 21.9% in December.
The monthly average inflation rate was 0.17% in January, down from 0.37% in December, while the annual average inflation rate was 14.35% in January against 19.86% in December.
Last week, CBE Governor Tarek Amer said the CBE will adopt an expansionary monetary policy in the near future. “But we first have to ensure that inflation is under control,” he added.
An expansionary monetary policy means that the CBE will reduce interest rates to increase funding and stimulate investments.
In its second review of the economic reform programme, the International Monetary Fund (IMF) recommended that caution should be exercised before easing the CBE’s current policies, as interest rates are still high.
Mohamed Abdel Aal, member of the board of directors of Suez Canal Bank and a banking expert, said that the CBE manages monetary policy very wisely and is fully aware of the impact of every step it takes on the economy and the country as a whole.
He explained that the CBE may not rush into cutting interest rates now for several reasons, including fears that the decline in inflation in recent months is not real and that it was the result of stagnation and weakness in the purchasing power of citizens and the existence of offers on some goods, next to the impact of the baseline calculation.
He added that there were also concerns that the interest rates cut would affect the continued flow of foreign investment in Egyptian debt instruments, which are currently the main sources of foreign exchange reserves. “We have no interest in losing them at the moment,” he stressed.
Moreover, Abdel Aal said that the interest rate cut would also affect the attractiveness of the pound for Egyptians working abroad and thus may affect their remittances transfers, which would hence impact the exchange rate controlled by supply and demand.
He added that the continued high interest rates on deposits at banks is important for the household sector—holder of the largest proportion of those deposits—to compensate it for high inflation levels.
In response to a question about the impact of keeping a high rate on banks and investment profits, Abdel Aal said that banks’ profits were not affected by the high interest they pay on their customers’ deposits because banks are able to compensate by investing in high-yield debt instruments.
As for investments, he explained, most major national projects are either financed by the government or by external loans and grants, which are unrelated to local banks, while small and medium enterprises (SMEs) are financed at a subsidised interests from the CBE, as are mortgage and tourism support initiatives.
According to Abdel Aal, the MPC can leave current interest rates unchanged until the end of the first quarter of this year, until the inflationary trend is confirmed, and then it can gradually reduce them.
He stressed the importance of not rushing to cut interest rates, pointing out that many countries have had similar experiences and kept the rates high for many years.
Meanwhile, Hany Aboul Fotouh, a banking expert, said that in light of the sharp drop in inflation since December 2017, the Monetary Policy Committee is expected to cut the rates on Thursday by 1% to reach 17.75% for deposit and 18.75% for lending.
He added that with expectations, in the coming months, of a decline in inflation to a single digit by the end of the year, this will reflect on the interest rate, predicting it will fall to 13.5-14.5%.
He noted that the CBE may raise interest rates again if inflation hikes.
Osama El-Menilawy, assistant general manager of the treasury sector at a private bank operating in Egypt, said that, according to a number of factors, interest rates could be lowered gradually by 0.5-1% in order to prevent a market shock.
He pointed out that some of the most prominent factors include declining inflation, the tendency of banks to link deposits to the CBE for long periods to benefit from the current high rate, as well as the turnout of foreigners buying debt instruments offered by the government, the low interest rates of treasury bills, and the IMF recommendations to reduce the internal debt of those instruments.
“Gradual reduction of interest will be driven by fear of foreigners’ reaction and stopping their purchases of government debt instruments if rates are cut suddenly,” El-Menilawy explained.
With regard to the future interest of the pound until the end of this year, he said that it depends on the continued improvement of the economic situation, and curbing inflation to its target, expected at 12% by the IMF, next to finding alternatives to foreign cash if foreigners drop the debt instruments as interest goes down.
He noted that controlling these indicators and the improvement of the Egyptian economy, paired with sustaining inflow of hard cash will fuel the decision to cut the rates down.
