The Central Bank of Egypt (CBE) is likely to raise interest rates to combat inflation at its meeting Thursday, a survey conducted by Ahram Online showed.
Out of the five economists interviewed by Ahram Online, three predicted that the CBE would raise interest rates, either fully or partially. The other two believe the CBE would keep its main interest rates unchanged.
The Monetary Policy Committee (MPC) of the CBE postponed its rate decision last Thursday, 17 December, by one week, citing a need to achieve “full coordination and commitment on macroeconomic objectives with the government, including targets for fiscal consolidation, current account outturns and the implementation of urgent structural economic reforms,” according to its statement.
The MPC will have to decide whether to maintain, raise or cut overnight deposit and lending rates, currently set at 8.75 and 9.75 percent respectively.
“The interest rate decision this time is very hard,” Omar El-Shenety, managing director at Multiples, told Ahram Online.
Raising the corridor rates will necessarily reflect on other market interest rates, increasing the cost of borrowing to the private sector and the government, El-Shenety said, while keeping the rates unchanged might exacerbate rising inflation, which jumped to 11.1 percent in November from 9.7 percent in the previous month, as well as pressure on the overvalued local currency.
Pressured by the need to contain inflation, ”The CBE may opt to raise interest rates, but only a mild raise — not more than 50 basis points — so as not to increase the burden on the state budget in the form of debt service,” said El-Shenety.
Another scenario could see the CBE raising the deposit rate by 50 basis points, while keeping overnight lending rates unchanged, says Mohamed Abu Basha, economist at Cairo-based investment bank EFG-Hermes.
This would aim at “keeping lending rates to corporates stable,” he said.
“The CBE may have postponed its interest rate decision for one week to give time for news about foreign currency inflows from Saudi Arabia and signing the World Bank loan to spread in the market and improve business sentiment,” said El-Shenety.
Egypt is expecting to receive a $1 billion tranche of a $3 billion World Bank loan before the end of this month, along with a $500 million facility from the African Development Bank.
Moreover, Saudi Arabia announced assistance for Egypt to cover its oil needs over the next five years, in addition to more than $8 billion in investment.
The CBE might also opt to raise interest rates indirectly by encouraging state-owned banks to hike rates offered to their clients.
Last month, several state-owned banks launched savings certificates in Egyptian pounds with an interest rate of 12.5 percent to support the currency. The average interest rate at Egyptian banks hovers around 10 percent currently, according to a Cairo-based banker.
“The CBE is likely to extend the use of this tool, so we can see a higher interest rate on certificates of deposits next year in major public banks, instead of raising corridor rates," added El-Shenety.
Others are more certain that an across the board hike is the most likely outcome of tomorrow’s meeting.
“I expect the CBE to raise interest rates by 50 basis points to lessen the pressure on the pound,” Ziad Waleed, economist at Beltone Financial, told Ahram Online.
“There is a need to restore consistency in theinterest rate direction of the banking system due to the current disparity in interest rates among commercial banks — mainly between major state-owned banks on one hand and private banks on the other,” explained Waleed.
Promises of foreign currency inflows from international institutions and Saudi Arabia announced in recent weeks mean that “The CBE can opt to have an interest rate hike and devalue later, or devalue significantly in the near-term and end effectively the current dual exchange rate,” Waleed added.
“The CBE can make use of the recent inflows in reducing the extent of overshooting in the currency in case of a significant devaluation,” said Waleed.
Overshooting is a situation that may follow a shift to a floating exchange rate regime where the domestic currency weakens significantly (at more than fair value) due to short-term speculative behaviour. This behaviour, however, subsides afterwards as speculative demand for foreign currency wanes, lifting the domestic currency to its fair value.
The pound has come under significant pressure since January 2011, as political instability scared away foreign investors. The pressure intensified more in the current year due to weak Suez Canal revenues, suffering tourism and fading Gulf aid.
“I believe that the CBE will not devalue the pound before closing the opened foreign currency positions of banks’ clients”. Thus, “we may see a devaluation of around LE0.50 in the pound in the last quarter of the current fiscal year (second quarter of 2016) but not in the very near-term”, El Shenety said.
Other experts predict that the strain on the budget will deter the CBE from hiking rates this week.
“A one percent increase in CBE benchmark interest rates will add LE20 billion to the government debt service,” said Eman Negm, economist at Prime Holding. “Investment and growth are suffering, so I don’t think the CBE will raise interest rates,” she said.
Egypt’s budget deficit in FY2014/15 reached 11.5 percent of GDP, compared to a target of 8.9 percent set for that year.
“A tightening of monetary policy will be a negative sign for investment sentiment in Egypt,” said Negm.
The upcoming MPC meeting will be the first under new CBE Governor Tarek Amer, whose predecessor, Hisham Ramez, resigned amid a mounting foreign currency crisis.
“An interest rate hike will not be positive to the private sector,” agrees Hany Farahat, economist at CI Capital, who also expects no change in the CBE’s interest rates.