The Central Bank of Egypt (CBE)'s monetary policy committee, at its scheduled meeting, has decided to leave its key lending rate and deposit rate unchanged at 10.25 per cent and 9.25 per cent, respectively, following a scheduled meeting this week. The move had been expected given recent decreases in the inflation rate.
Egypt's annual inflation rate stood at 7.3 per cent in June versus 8.3 per cent in the 12 months to May, which means good news for bank depositors who are now close to having a positive real interest rate for the first time in years.
The real interest rate, which is calculated by subtracting the nominal interest rate from the inflation rate, reflects the purchasing power of money deposited in banks, and whether it will increase or decrease.
"With the interest rate at commercial banks at about 7 per cent, the real interest rate is still negative, or, in some cases, slightly positive – but not really, as it will never exceed 0.5 per cent," Hani Genena, chief economist at Pharos Holdings, told Ahram Online.
In fact, since 2007, money deposited at commercial banks has lost purchasing power, with the exception of some long-term deposits and certificates of deposits that banks offer in order to obtain liquidity when needed.
"The CBE's main policy goal is to support the Egyptian pound," said Genena. "The aim is to prevent dollarization; containing inflation is not currently the primary target."
With the sharp decrease of Egypt’s international reserves in the wake of last year’s revolution, dollarization – or any increase in demand of foreign currencies – is not needed at all.
However, the problem is that inflation forecasts for the coming year are not very positive, given expected increases in international food prices. For this reason, Genena pointed to two other factors: the risk of devaluation of the local currency and possible cuts to fuel subsidies.
Egypt's 2012/13 state budget allocates LE70 billion for fuel subsidies, down from LE95 billion last year.
"I wouldn't be surprised if inflation reached some 20 per cent next year. I fear that we'll enter an unprecedented cycle of inflation," said Genena, noting recent price hikes for several vital food commodities.
"Increased corn prices," he added, "is affecting dairy, poultry and meat products, since corn is generally used as fodder."
Rising inflation will not be good news for bank depositors.
Genena points out that interest rates decided now will affect depositors later on down the road. If his predictions about inflation turn out to be right, real interest rates can be expected to plunge next year.
The CBE also left the discount rate unchanged at 9.5 per cent, and the week's repurchase agreement (repo) rate at 9.75 per cent.