Analysts say the decision was expected, and it will support economic growth, reduce the budget deficit, and improve stock market activity
The Central Bank of Egypt (CBE) cut its basic interest rates by 3%, bringing the overnight deposit rate to 9.25% and its lending rate to 10.25%, while the main operation and discount rates were both cut to 9.75%, during an emergency meeting of the Monetary Policy Committee on Monday.
The CBE said this step comes in light of the global developments and aims to preserve the gains of the national economic reform programme.
The MPC decisions followed an earlier batch of measures adopted by the CBE on Sunday to protect banks and their customers, as well as the Egyptian economy as a whole from the repercussions of the Coronavirus outbreak. The ordered postponement of all loan installment payments for small, medium, and micro enterprises for six months, and providing the necessary financing for import of basic commodities.
According to the MPC, the rate slash was an exceptional measure, which contributes to supporting economic activities in all sectors, taking into account the CBE’s target inflation of 9% (±3%) in the fourth quarter (1Q) of 2020.
The committee affirmed that it will not hesitate to take any necessary steps regarding interest rates, and will not deviate from the bank’s role, which is to maintain price stability in the medium term.
Commenting on the MPC decision, CBE Governor Tarek Amer said the bank has taken strong measures in anticipation of the possible impacts of global conditions on Egypt’s economy.
In a press statement at the cabinet headquarters, Amer added, “Our financial situation is strong, and we are making sacrifices to support the Egyptian economy.”
He stressed that the interest rate cuts would support all parties in the local economy, whether private, pubic, or public enterprise sectors.
He explained that this step would help companies to preserve their profits, and would reduce the burden on the shoulders of the Ministry of Finance so that it can inject more funds in different sectors during in such hard times.
Amer added that the government’s economic group on Monday has taken many decisions to support all sectors, explaining that the rate cut actually affects all sectors.
He continued, “We have instructed banks to extend the term of all loans granted to SMEs for a period of six months, and we will include corporates in the decision as well.”
He pointed out that this will support all sectors, including tourism and services. The decision covers about EGP 1.8trn worth loans.
Amer noted that even individuals will benefit from the rate cut, explaining that the bank is encouraging plastic currencies and transactions.
The CBE also ordered banks to facilitate providing import letters of credit to purchase all necessary products from abroad.
As for working hours in banks, Amer said nothing will change in this regard, but each bank can put its own plan to ensure workflow consistency and protect employees, such as remote work.
In the wake of the Coronavirus outbreak, many bank leaders and experts had expected that the CBE would cut interest rates to face a possible global recession, especially after the US Federal Reserve cut interest rates on the dollar to 0% in an exceptional session on Sunday.
The US Fed cut interest rates for the second time in less than two weeks to support the US economy amid the ever-expanding Coronavirus pandemic around the world.
Several Arab central banks took similar decisions, as the Central Bank of Kuwait reduced the discount rate by 100 basis points to 1.5%, the lowest Kuwaiti interest rate ever. The Saudi Arabian Monetary Authority reduced rates by 75bp, while the UAE made a similar decision. The Qatar Central Bank also cut the main interest rates by 50bp.
Mohamed Abdel-Aal, the banking expert and board member of the Suez Canal Bank, stressed that the decision of the US Fed to reduce interest rate to zero, encouraged the CBE to reduce its rates exceptionally, instead of providing initiatives with varying interest rates.
He added that the zero interest rate on the US dollar helped in a way the CBE to reduce interest on the local currency.
Moreover, banking expert Tarek Metwally said, “We need at this stage to reduce the interest rates to activate the investment and the production in order to face the possible recession in the wake of the Coronavirus.”
He ruled out that the rate cut would push bank depositors to withdraw their savings because the rates are still better and higher compared to the US dollar.
Radwa Al-Swaify, head of Research at Pharos Holding, confirmed that reducing interest by 3% at one time is a daring and very appropriate move.
She explained that this decision would support growth, reduce the budget deficit, revitalise the industrial sector, and improve the performance of the stock exchange.
Abo Bakr Imam, head of research at Sigma Securities Brokerage, also believes the CBE’s decision to cut interest rates was highly needed, and would encourage and support consumer purchasing power and encourage companies to borrow, expand, and push production forward.
It will also be considered a good precaution for companies affected negatively by the virus and unable to pay the salaries of their workers.
He pointed out that CBE was recently interested in supporting the Egyptian pound price against other currencies and attracting foreign investments, but that this matter became less of a priority with the current decision which prioritized the Egyptian economy which may witness a major crisis with the dropping purchasing power and increase in inflation rates.
With regard to the impact of the decision on the stock exchange transactions, he said no positive impacts are expected, while companies in various sectors will benefit greatly from the decision in support of their financing and expansion.
Hany Genina, Head of Research at Prime Investment Bank, said that CBE’s decision came just in time.
He ruled out that it would significantly affect the exchange rate, and added that the decline would be slight, taking into account the unrest of supply and foreign trade movement.
He explained that low inflation rates make way for real interest, which is an indicator that investors are constantly looking to build their vision of currency exchange rates.
He added that CBE does not have to intervene to maintain the exchange rate, especially as it is in favor of exports that the pound falls slightly and the currency’s competitiveness increases, especially in with the currency’s drop.
He explained that Egyptian banks enjoy a large amount of liquidity, as evidence that the volumes traded in Corridor were not affected, which means there is liquidity surplus, so enhancing liquidity is not a priority, and reducing weekly bids for open market operations may fulfill the purpose.
Chairperson of the Engineering Export Council of Egypt (EEC), Amr Abu Freikha, said that decision to slash interest rate would be good if it was taken in another time but current circumstances need more precautionary measures to preserve the industrial sectors from the crises.
Abu Freikha elaborated that the decision may be issued for supporting the listed companies in EGX because it does not help much the industrial sector, demanded the government to issue two key decisions to support and promote manufacturers. The first is extend exemptions without interest for six months for SMEs and must also be activated for large companies. In addition to, taxes are exempt for 6 months, which also will contribute to preventing these companies to achieve losses and decreasing exports.
CEO of EEC Maha Saleh said that the decision will support companies in revitalizing and evolving the sector in the light of fears and recession may happen due to spread of Coronavirus.
Saleh explained that the decision will fix the inflation rates on 9% to no to hike prices, added that facilitating banks procedures will promote the SMEs largely.
Chairperson of the Chemical and Fertilizers Export Council Khaled Abul Makarem said the decision will help to revitalise the industrial sector and help in financing low-cost industrial sector, which will support SMEs eligible for export.
Abul Makarem pointed out that the decision will also help the troubled factories a lot in the resumption of their work, noted that 30% of the industrial economy is between faltering factories and factories that are not operating at full capacity.
