The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene on Thursday to discuss the possibility of cutting interest rates or maintaining them at 15.75 per cent.
Many observers are more inclined towards the former scenario based on the recent variables in the domestic market, particularly the decrease in inflation rate – which dropped to 7.8 per cent in July – and international fluctuations affected by a looming recession.
A Reuters poll, published on Tuesday, found the CBE was likely to cut its key interest rates by at least 100 basis points (bps), driven by July inflation figures which came in significantly below expectations.
Seven out of 13 economists surveyed by Reuters said the MPC would cut overnight rates by 100 bps, which would bring the deposit rate to 14.75 percent and the lending rate to 15.75 percent. Three economists expected even steeper 150 bps rate cuts, while others said the CBE was likely to keep its overnight rates unchanged.
Shuaa Securities said if the CBE were to introduce additional interest rate cuts, there was a 79 per cent chance the move would reflect positively on the EGX performance after one month.
Investors in the local market expect a notable cut in interest rates. Mohamed Genedy, the chief of industrial investors, told Ahram Online interest rates were likely to be cut by between 0.5 percent and one percent based on the local and global variables which make the interest rate cuts a necessity.
“The US has decreased its interest rates and world countries are following in its footsteps. Egypt needs to keep up with the global market to attract more investments, this being the main goal of its economic reform programme. Investors seek security and political stability in the markets where they put their money. And they also seek stable interest rates,” he added.
“Deposits in Egypt’s banks amount to EGP 4 trillion. Forty-five percent of these are invested, while the rest are frozen, as banks disburse deposits without investing them. Meanwhile, 80 percent of these deposits are government-owned. In Saudi Arabia deposits are owned by the private sector, and in the UAE 90 percent of them are privately owned. This is why their economy is thriving and they don’t have a notable gap between their inflation and interest rates,” Genedy explained.
High interest rates in Egypt, he added, have a negative effect on the industrial sector and business community, opining that interest rates ought to be cut by an additional four percent over the coming year to send a positive message to investors and lay the groundwork for an economic revival.
Vice Chairman of Prime Holding Mohamed Maher expected the MPC will introduce a maximum of one per cent in interest rate cuts.
The business community was anticipating a two per cent interest rate cut based on the fact that the gap between inflation and interest rates has reached seven percent, Maher told Ahram Online. There was a chance a more reasonable balance between the two rates be achieved through higher interest rate cuts, he added.
“Maintaining the same interest rate will do more harm than good to the domestic market. On a global level, markets with high interest rates are sluggish, which drove world markets towards cutting interest rates to ease their economies,” Maher said, adding that “in Egypt, the exchange market is a tool of indirect investment. The declining performance in the real estate sector, for example, is the result of the country’s high interest rates.”
Headline inflation dropped from 9.4 percent in June to 8.7 percent in the following month. The decrease was unexpected since it came on the back of fuel price hikes that ranged between 16 percent and 30 percent. The increase in fuel prices is part of the economic reform programme and one of the conditions Egypt had to meet to receive a $12 billion loan, in tranches, from the International Monetary Fund.
At the MPC’s last meeting in July, the committee decided to fix interest rates at 15.75 percent for overnight deposits, 16.75 percent for overnight lending, and 16.25 percent for the main operation. The discount rate was also kept unchanged at 16.25 percent.