The Central Bank of Egypt (CBE) will be deciding on the fate of the EGP’s interest rate on Thursday, when its Monetary Policy Committee (MPC) will meet for the last time this year to discuss the position of the basic interest rates, which are the most prominent indicator of the direction of the pound’s interest in the short term.
The committee decided in an extraordinary meeting on 27 October to raise the basic interest rates of the CBE by 2% to reach 13.25% for deposits, 14.25% for lending, and 13.75% for the credit and discount rate and the price of the main operation within the bank. Given the CBE’s decision, along with the cumulative additions it made beforehand, the EGP’s interest rate has increase by a total of 5% in 2022.
The MPC stressed that the aim of raising interest rates is to contain inflationary pressures resulting from the demand side, the high rate of domestic liquidity growth, inflationary expectations, and the secondary effects of supply shocks.
Earlier this month, the CBE revealed that the annual core inflation rate had increased to 21.5% by the end of November, compared to 19% in October.
It also explained that the monthly rate of core inflation recorded 2.7% in November, compared to 3% in October and 0.5% in November 2021.
The Central Agency for Public Mobilisation and Statistics (CAPMAS) also revealed that the inflation rate in Egyptian cities rose to 18.7% by the end of November, compared to 16.2% in October.
Also, according to the agency, the annual inflation rate for the entire republic recorded 19.2% at the end of November, compared to 16.3% in October and 6.2% in November 2021.
Furthermore, HC, Zila Capital, and Naem Financial expect the interest rate to increase by 200 basis points at Thursday’s meeting, while Hermes and CI Capital expect it to rise by 100 points, and Prime Financial and Beltone expect it to remain unchanged.
Additionally, a Reuters poll that included 12 analysts suggested that the CBE would raise interest rates by 200 basis points.
“We expect the MPC to raise the interest rate by 200 basis points in order to confront inflation and to attract inflows that benefit from price differences,” said Heba Mounir — Analyst of the Banking Sector and Macroeconomics at HC Securities and Investment.
She indicated that inflation accelerated in November, as it rose by 2.3% on a monthly basis and 18.7% on an annual basis, exceeding the company’s estimates of 16.5%, pointing out that this acceleration, along with the current shortage in foreign capital inflows, led to the company’s expectation of recording an annual inflation rate of 19.1% in December.
“The average return on the 12-month treasury bills after tax reached 15.99%, accounting for a tax rate of 15% for US and European investors in the offering held on 8 December with a bid-to-cover ratio of 3.20 times, indicating the need to raise returns.”
She also explained that Egyptian treasury bills for 12 months currently offer a real return of negative 0.1%, and calculating the expected increase of 200 basis points in the interest rate at the CBE will attract flows benefiting from the price differences.
