In a long-awaited move, the Central Bank of Egypt (CBE)’s Monetary Policy Committee (MPC) decided during its meeting on 22 August to lower interest rates on overnight deposits to 14.25 per cent, while the overnight lending and discount rates were slashed to 15.25 per cent and 14.75 per cent, respectively.
Although the move to lower rates on overnight lending and deposits had been expected, experts had not foreseen a 150 basis points cut in one go.
The cuts will benefit borrowers but will negatively affect depositors by lowering the interest they earn on deposits. The biggest winner, however, will be the government, which will pay lower interest on its domestic debt.
The government borrows regularly from the market through treasury bills and bonds as a means of financing the budget deficit.
Mohamed Abu Basha, head of macroeconomic analysis at regional investment bank EFG-Hermes, does not believe that depositors will be greatly harmed by the MPC decision, however.
“Depositors will not withdraw their money from the banks” because the interest rates are still higher than inflation, he said. He added that the cuts in interest rates would increase the size of borrowing from banks, encourage people who owe large amounts to the banks to pay their debts, boost investment in the real-estate sector, and revive the stock market.
This is the fourth cut in interest rates since the floatation of the pound in November 2016.
Following the MPC decision, the national and private banks also cut the rates on their financial products. National Bank of Egypt interest rates on long-term deposits now average around 14 per cent. At the private-sector banks interest rates on such deposits average between 10 and 12 per cent.
Economist Reham Al-Desouki said the MPC decision would help investors reconsider their investment plans, but they would likely not invest larger amounts of money until interest rates were further lowered by two or three per cent.
After the MPC meeting last week, yields on treasury bills in Egyptian pounds fell to 16.5 per cent. CBE data showed that the average yield on 91-day treasury bills was 16.4 per cent, down from 17.9 per cent in a previous tender. The lowest yield on 91-day treasury bills was recorded in October 2016 and stood at around 15.6 per cent.
According to the CBE website, the average yield on 266-day treasury bills fell to 16.37 per cent, down from 17.83 per cent in the previous tender for instruments of the same maturity. This is the lowest yield since 11 October 2016, which recorded 16.415 per cent.
However, investment bank Beltone noted that “Egyptian treasuries will remain attractive, even after mirroring the interest rate cut, underpinned by a strong pound and rising real interest rates given the inflation deceleration.” Among emerging markets with comparable yields, Egypt still stands out because of its improved macro-economic indicators and above five per cent GDP growth, Beltone said.
It anticipated that the cuts would not lead the pound to depreciate against the dollar, expecting it to stand in the range of LE16 and LE17.
Beltone said that the pound would not appreciate beyond LE16 per dollar, as higher levels “might induce demand for the dollar, particularly among wholesale and retail players who are currently active in imported consumer products as well as consumer staples players who will seek to accumulate raw materials at lower costs.”
The bank’s positive outlook for the Egyptian pound is based on factors including improvements in Egypt’s hard-currency revenues, “with the positive implication of a shift in the net oil balance to a surplus for the first time since 2015.”
Other factors include adequate level of reserves covering 7.8 months of imports, and “a manageable external-debt-servicing schedule, where short-term debt to total external debt fell to 10.7 per cent in December 2018, down from 13.3 per cent in June 2018.”
The bank said the CBE’s latest decision would boost the market thanks to the greater availability of liquidity. It would also allow the stock market to open the door for share prices to rise.
Beltone foresees another interest rate cut by 100 basis points during the MPC’s 14 November meeting and another decrease by 300 basis points in 2020.
Shuaa, an investment bank, said last week that the lowered interest rates would yield positive results on the performance of the stock exchange’s main index.
However, it added that although the cuts would generally reflect positively on the market, the decrease was not enough to start a comprehensive investment cycle. The group of companies that stood to benefit most from the interest rate cuts were those with high debts, it said.
*A version of this article appears in print in the 29 August, 2019 edition of Al-Ahram Weekly newpaper