The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will convene its seventh regular meeting of the year on Thursday to determine the bank’s basic interest rates, which are the main indicator of the short-term direction of the pound’s interest rate.
The meeting comes amid divergent expectations from investment banks and local experts about the expected decision, considering the rising inflation rates and the CBE’s efforts to curb them, as well as the adverse impact of higher interest rates on economic activity, lending, and various sectors.
In its previous meeting on 21 September 2023, the committee decided to keep the CBE’s basic interest rates unchanged at 19.25% for deposits, 20.25% for lending, and 19.75% for credit, discounts, and the CBE’s main operation. These rates are expected to remain at their current high levels.
The committee stated that it will continue to evaluate the effect of the tight monetary policy measures on the economy, based on the data received in the upcoming period. It also noted that the future course of the basic interest rates depends on the projected inflation rates, not the current inflation rates.
The committee affirmed that it will monitor economic developments and expectations in the coming period and will not hesitate to use all available monetary policy tools to maintain tight monetary conditions, to achieve the targeted inflation rates of 7% (±2%) on average in the fourth quarter of 2024 and 5% (±2%) on average in the fourth quarter of 2026.
Earlier, the CBE announced a drop in the annual core inflation rate to 39.7% in September 2023, compared to 40.4% in August.
It explained that the headline consumer price index recorded a monthly rate of 1.1% in September 2023, compared to 1.6% in September 2022, and a rate of 0.3% in August 2023.
The Central Agency for Public Mobilization and Statistics also reported an increase in the annual urban inflation to 38% in September 2023, compared to 37.4% in August and 15% in September 2022.
On the other hand, HC Securities and Investment’s research management predicted that the CBE’s MPC will raise the interest rate by 1% at its meeting scheduled for Thursday.
Heba Mounir, the company’s macroeconomics analyst, said: “We expect inflation in Egypt to continue rising by 2.6% monthly and 38.0% annually in October, following the September figures. This reflects the shortage of basic commodities and products due to import and export restrictions on some crops, foreign currency supply scarcity, and seasonal factors related to the start of school and university year.”
Mounir expected that the committee would raise interest rates by 200 basis points before the end of this year, including 100 basis points at tomorrow’s meeting, to maintain the stability of the Egyptian pound against foreign currencies amid recent increases in Egyptians’ gold purchases which may contribute to further inflation.
Meanwhile, Capital Economics expected CBE to keep its main interest rates unchanged at the meeting of the Monetary Policy Committee on Thursday, despite rising inflation and pressure on the currency.
Capital Economics, a London-based research firm, said that the CBE may raise interest rates by 200 basis points after the presidential elections scheduled for December, along with a devaluation of the pound.
James Swanston, the Middle East and North Africa economic expert, said: “After the CBE surprised analysts by raising interest rates by 100 basis points in August, it paused its tightening cycle last month. Since then, inflation has accelerated further to 38% year-on-year in September, while the pound has faced more pressure. However, given that the presidential elections are just over a month away, we think that policymakers will opt for stability and keep interest rates on hold.”
A Reuters report also indicated that most of the 16 analysts surveyed favoured the CBE maintaining the deposit interest rate at 19.25% and the lending rate at 20.25% at the meeting next Thursday. Only three analysts predicted a 100 basis point hike in interest rates.
Carla Salim, an analyst at Standard Chartered Bank, said that the CBE may continue to refrain from any moves in both the exchange rate and interest rates until the completion of the potential increase in the International Monetary Fund programme. Egypt is seeking to secure an additional $4.6bn from the IMF to support its economic recovery from the Covid-19 pandemic.
