The Central Bank of Egypt (CBE) will hold its sixth regular meeting of the year on Thursday to decide on the basic interest rates of the Egyptian pound, which affect the short-term interest rate in the local market. Most analysts expect the CBE to keep the rates unchanged this time, after raising them by 1% in its previous meeting.
The CBE increased its basic interest rates by 1% on 3 August to 19.25% for deposits, 20.25% for lending, and 19.75% for the credit and discount rates and the main operation rate of the CBE. The CBE said that this decision was based on the high inflation expectations in some major economies, and the need to maintain restrictive monetary conditions to achieve the targeted inflation rates of 7% (± 2%) by the end of 2024 and 5% (± 2%) by the end of 2026.
The CBE also said that the path of the basic interest rates depends on the expected inflation rates and not the prevailing inflation rates and that it will continue to monitor the economic developments and expectations in the next period, and will not hesitate to use all the available monetary policy tools to achieve its inflation targets.
According to the CBE, the annual core inflation rate, which excludes volatile items, declined to 40.4% in August 2023, compared to 40.7% in July 2023. The core consumer price index recorded a monthly rate of 0.3% in August 2023, compared to 0.6% in August 2022, and 1.3% in July 2023.
The Central Agency for Public Mobilization and Statistics (CAPMAS) reported that the annual consumer price inflation in Egyptian cities rose to 37.4% in August 2023, compared to 36.5% in July 2023. On a monthly basis, prices rose by 1.6% in August 2023, compared to 1.9% in July 2023. The CAPMAS also said that the annual inflation rate for the whole country reached 39.7% in August 2023, compared to 38.2% in July 2023, and 15.3% in August 2022.
Heba Mounir, the macroeconomic analyst at HC Securities and Investment, said: “We expect the inflation rate in Egypt to rise by 1.8% on a monthly basis and 37.8% on an annual basis in September, due to the decline in imports of some essential goods and products as a result of the foreign currency shortage, along with the seasonal impact of the start of the academic year for some schools and universities.”
Mounir also said that Egypt’s balance of payments recorded a deficit of $317m in the third quarter of the fiscal year 2022/2023, despite having a surplus in the previous two quarters, due to a decline in exports by about 17% on a quarterly basis during the third quarter, while the net foreign exchange reserves rose by 4.39% on an annual basis and 0.14% on a monthly basis to $34.9bn in August, and the deposits not included in the official reserves rose by 1.6% on a monthly basis and 5.35 times on an annual basis to reach $4.74bn in August.
She added: “Similarly, the net foreign currency liabilities of the banking sector decreased by $822m monthly to $26.3bn in July, as the net foreign currency liabilities of the banks without the CBE decreased by $965m monthly to $16.1bn, due to an increase in the foreign assets of the banks without the CBE by 8% monthly, while the foreign liabilities remained stable.
We believe that the MPC is likely to keep the interest rate unchanged at its meeting scheduled for 21 September to allow time for the economy to absorb the impact of the recent increase of 100 basis points in August, especially since inflation is driven by a supply shortage and not by a demand increase,” Mounir said. She added: “In addition, the 12-month Treasury bills recorded an average yield of 25.541%, an increase of 663 basis points since the beginning of the year and 83 basis points monthly, partly reflecting the interest rate hike of 100 basis points on 3 August, which would offset the rise in credit default swaps.”
A Reuters poll also showed that the CBE is expected to keep the overnight interest rates unchanged at its meeting on Thursday, despite inflation reaching its highest levels ever in the past three months.
The average expectation in a survey that included 17 analysts was that the bank would keep the deposit rate at 19.25% and the lending rate at 20.25%, while five analysts expected the bank to raise the interest rates by 100 basis points, and one expected the raise to be 200 basis points.
Aya Zuhair, economist at Zilla Capital, said: “The main reasons behind keeping the interest rates stable are that the latest inflation rates last month were lower than expected and that the exchange rate is stable in both the official and parallel market.”
Other analysts said that with interest rates well below the inflation rate, a rate hike looks inevitable in the future.
Sarah Saada from CI Capital said: “Even if the CBE keeps the interest rate this time, we expect it to be raised later more than once, as the cycle of increase has not ended yet.”
