The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is expected to keep interest rates on hold during its seventh periodic meeting this year, on Thursday.
The MPC decided to maintain interest rates, for the fourth consecutive time, at its meeting on 13 August, after cutting the interest rate by 300 basis points (bps) at an emergency meeting on 16 March.
The Research Department at HC Securities and Investment expects that the CBE will keep interest rates unchanged.
Monette Doss, a Senior Analyst for the company’s macroeconomic and financial services sector, said that inflation remains under control, far below the CBE target of 9% (+/- 3%) for the fourth quarter (Q4) of 2020. The levels are also lower than previous expectations of 4.2% for the month.
On an annual basis, this is due to lower food prices and weak consumer spending from HC Securities and Investment’s point of view, who currently expect inflation to decline to approximately 5% in Q4 of 2020. The prediction reflects a downturn from their previous expectations, which were placed at approximately 6%.
“The real interest value increased to 4.7% and 7% on short-term deposits and loans, respectively, and this is much higher than the 12-year average, which achieved -3.3% and 0.8%,” Doss said, “We believe, however, that the high real interest rate environment is justified by the weak liquidity of the banking sector.”
The volume of open market operations, which is an indicator of interbank liquidity, decreased to approximately 10% of total foreign currency deposits in August. This is far less than the 12-year average, which achieved nearly 21% (except for the 2011-2013 period), Doss said.
“On the other hand, the banking sector has achieved a net foreign liabilities position since the large exit of foreign capital from the Egyptian debt instruments market that occurred in March, but partially declined to reach $1.8bn in July,” Doss added, “Accordingly HC expects the CBE to keep the interest rate unchanged at its meeting scheduled for Thursday.”
Banking expert Hany Aboul Fotouh said that the closest scenario relating to the MPC meeting on Thursday is the fixing of interest rates.
Aboul Fotouh said that there are several factors that the CBE takes into consideration when discussing interest rates, the most prominent of which is inflation. In August, Egypt’s annual inflation rate decreased to 3.6%, compared to 4.6% in July, and 6.7% in August 2019, which is lower CBE’s target.
He added that the CBE will maintain the Egyptian market’s attractiveness, to maintain foreign investment flows into the country. This comes especially after the real rates of return in the country are now the highest among emerging markets, especially that the current levels of interest not representing an obstacle to economic activity. This lack of obstacles is required to boost the local economy during and after the novel coronavirus (COVID-19) pandemic.
Aboul Fotouh added that the CBE has become comfortable with setting interest rates, especially as the Federal Reserve continues to maintain zero interest rates. This reduces the pressure to maintain flows of foreign investors in government debt instruments.
Similarly, Radwa El-Swaify. Head of Equity Research at Pharos Holding Investment Bank, expects the MPC to keep rates unchanged. She added that the current levels of interest provide a good balance between economic growth, budget considerations and support for companies.
At the same time, the high real interest prevents the spread of dollarization, whilst maintaining the continuation of foreign direct investment (FDI) flows to fixed income instruments in Egypt.
El-Swaify confirmed that the National Bank of Egypt (NBE) and Banque Misr suspension of their 15% certificates will not affect CBE’s decision. At the same time, the National Investment Bank (NIB) has reduced the interest on “A” and “B” certificates. Whilst this is not an indication of the possibility of the CBE’s reducing interest, she noted that these moves are related to banking conditions in Egypt.
