The Central Bank of Egypt (CBE)’s Monetary Policy Committee (MPC) will hold its final meeting of the year on Thursday to decide on the central bank’s key interest rates, which affect the short-term direction of the pound’s interest rate.
Major global central banks, led by the US Federal Reserve, have kept their interest rates unchanged in their latest meetings throughout 2023. Markets are anxiously waiting for the CBE’s decision, which is uncertain this time, due to the persistent slowdown in inflation rates and the International Monetary Fund’s advice for Egypt to adopt a tighter monetary policy to control inflation and reach its target levels.
The CBE aims to achieve inflation of 7% (±2%) on average during the fourth quarter of 2024 and 5% (±2%) on average during the fourth quarter of 2026.
On 2 November 2023, the MPC maintained the central bank’s key interest rates for the second time in a row, at 19.25% for deposits, 20.25% for lending, and 19.75% for credit, discount rates, and the central bank’s main operation. This followed a 300 basis points hike earlier in the year and an 800 basis points hike in 2022.
The MPC stated after its meeting on 2 November that the key interest rates depend on expected inflation rates rather than current inflation rates. It is committed to monitoring economic developments and risks around inflation expectations.
The MPC affirmed its readiness to use all available monetary policy tools to keep monetary conditions tight, aiming to achieve the inflation targets. It will also continue to assess the impact of the restrictive monetary policy measures and their effects on the economy, based on upcoming data. The CBE recently reported a drop in the annual core inflation rate to 35.9% in November 2023, from 38.1% in October. The headline Consumer Price Index recorded a monthly rate of 1.0% in November, down from 1.8% in October.
Mohamed Abdel Aal, a renowned banking expert, said there is a significant difference in speculations and expectations about the interest rates, especially with the U.S. Federal Reserve keeping interest rates on the dollar. He also mentioned a new factor, arising from geopolitical security tensions in the Red Sea, which may affect global and local inflation rates if the situation gets worse. On the other hand, he noted a continuous decline in overall inflation in November, marking a downward trend for the second month. The gradual decrease in the core inflation rate also raises conflicting questions about the possibility of increasing or keeping interest rates in the next meeting of the MPC on Thursday, the last meeting of the year.
Abdel Aal commented: “In my view, Egypt’s ‘stubborn’ inflation rate has, at least temporarily, softened and started to respond to changes in interest rates. This does not contradict our affirmation that the exchange rate, in our current circumstances, still has a direct and reciprocal impact on inflation rates. Addressing the current pressures on the exchange rate and halting the continued devaluation of the Egyptian pound against the dollar are key factors in containing its currently high rates.”
He emphasized that for local interest rate hikes to succeed in containing inflation, there must first be a focus on achieving exchange rate stability. Concentrating on raising interest rates more than they currently are may not be beneficial to the overall economy in both monetary and financial aspects.
“In my opinion, the Monetary Policy Committee may prefer interest rate stability in the current stage,” said Abdel Aal. He explained his expectations for several reasons, such as the idea that continued interest rate hikes may not benefit the national economy, banks, or individuals. Monetary policy’s focus on raising interest rates could lead banks to increase financing or lending interest rates for producers, passing on the cost to consumers, resulting in higher prices and more inflationary pressures.
Abdel Aal also pointed out that raising interest rates could cause a rise in Treasury bill prices, increasing the burden of local debt service and budget deficit. Each 1% increase in interest rates implies an approximately EGP 30bn increase in the budget deficit, depending on the cost increase.
He observed that the mechanism of interest rate hikes has lost its impact on containing Egypt’s stubborn inflation. Despite multiple reductions totalling 11%, including 3% in March and August 2023, and 8% in 2022, the interest rate reached 19.25% for deposits and 20.25% for lending, yet inflation remains high and far from set targets.
Abdel Aal asserted that raising interest rates, especially at their current levels, could negatively affect the customer base of banks, especially those benefiting from personal or consumer loans or various retail products. Higher financing costs or reduced lending-to-income ratios could affect all medium and small-scale financing activities, potentially raising default rates.
“In my view, the current strategic focus should be on prioritizing incentives to attract foreign currency deposits and offering exceptionally high-interest rates for dollar certificates, possibly reaching non-competitive rates in the form of one-year dollar certificates with a minimum of $10,000 per certificate,” according to Abdel Aal.
On the other hand, the research department at HC Securities and Investment predicted that the Monetary Policy Committee of the Central Bank of Egypt would keep interest rates unchanged in its next meeting on Thursday. This prediction is based on the current situation in Egypt, with expectations of economic reforms in the weeks following the re-election of President Abdel Fattah Al-Sisi.
Heba Mounir, a macroeconomic analyst at the company, stated: “Based on the decline in inflation rates in Egypt for the past two months, we have lowered our inflation rate expectations. We expect inflation to rise by 1.9% monthly and 34.4% on an annual basis in December, reflecting the shortage of supply in essential goods and other products affected by reduced imports, as well as the export of some crops and a decrease in dollar liquidity.”
“We expect the Monetary Policy Committee of the Central Bank of Egypt to keep interest rates unchanged in its meeting next Thursday due to the decline in inflation rates, driven more by supply-side forces than demand. Although the U.S. Federal Reserve keeps interest rates unchanged and there is also an improvement in Egypt’s credit default swap index, we do not rule out the possibility of an interest rate hike if there is movement in the exchange rate. However, we do not anticipate that happening in the next committee meeting,” said Mounir.
A Reuters poll suggests that the Central Bank of Egypt will hold interest rates steady in its Monetary Policy Committee meeting on Thursday, even as economic reforms are expected to follow President Abdel Fattah Al-Sisi’s re-election. The poll, which surveyed 14 analysts, shows that the average forecast is for the Central Bank to maintain the deposit interest rate at 19.25% and the lending rate at 20.25%. However, six analysts predicted a hike of 100 to 300 basis points.
Simon Williams from HSBC Bank said: “I don’t think raising interest rates would be beneficial at this point. Inflation is already declining, and the weak GDP data and purchasing managers’ index indicators imply that there is no need to increase interest rates to restrain demand. I do see a need for policy tightening, but it should be accompanied by exchange rate adjustments, new support from the International Monetary Fund, and other factors.”
