Egypt’s interest rates likely to remain unchanged for the rest of 2021

Doaa A. Moneim, Wednesday 4 Aug 2021


The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) is scheduled to meet on 5 August to review key interest rates in the light of recent economic updates on the global and domestic levels. This will be the MPC’s fifth meeting this year.

The MPC has been keeping rates unchanged since November 2020, when it cut interest rates by 0.5 per cent (50 basis points). In June, the CBE maintained its overnight deposit rate, overnight lending rate, and rate of main operations at 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively. The discount rate was also kept unchanged at 8.75 per cent.

Mona Bedeir, a senior economist at investment bank Prime Holding, expects the CBE to maintain the current interest rates and not to introduce further cuts through the end of 2021.

Bedeir said that increases in the country’s inflation rate in 2021 had been driven by commodity prices and the Ramadan and Eid seasons.

She noted that inflation drivers in 2021 had been temporary, particularly in the local market, and that they did not reflect real inflationary pressures. The stability of Egypt’s foreign-exchange rate also mitigates any pressures, she said.

HSBC said in a statement last week that it expects the CBE to hold key interest rates unchanged in the light of June’s inflation readings, predicting price levels in the domestic market to not exceed 0.5 points throughout 2021 owing to a decline in demand and a robust currency situation.

HC Securities and Investments also expects the CBE to maintain current interest rates, supported by inflation rate levels that meet its target.

Inflation is a key determinant in the CBE’s decision to increase or cut interest rates. It targets an inflation range of seven per cent (±2 percentage points) through the fourth quarter of 2022.

Egypt’s annual headline inflation rate inched up to 4.9 per cent in June 2021 compared to 4.8 per cent in May, according to figures released in July by the Central Agency for Public Mobilisation and Statistics (CAPMAS). But these figures are expected to take an upward curve in July.

Head of research at Pharos Holding Radwa Al-Swaify predicted that the CBE will keep interest rates unchanged. Speaking to Al-Ahram Weekly, she said she expected Egypt’s monthly urban inflation rate to record around 1.2 per cent in July, up from 0.2 per cent in June, and around 5.8 per cent on an annual basis.

She attributed her expectations to increases in the prices of tobacco, electricity, and fuel, and transportation prices.

“Given the inflation figures among other factors, we believe the MPC will prefer to hold rates steady in its next meeting scheduled on 5 August. The current scene including domestic factors — inflation outlook, real interest rates, and real yields — and global factors, including the US Federal Reserve’s signals of potential tightening in the course of two years, all indicate no need for rate movements for now,” Al-Swaify said.

“That is, rate cuts are not feasible, while there is no immediate need for hikes that would be costly on both the private sector and state budget fronts.”

The Federal Reserve decided to keep its benchmark interest rate near zero as the US economy continues to recover despite concerns over the Covid-19 pandemic’s spread and its ongoing implications.

The International Monetary Fund (IMF) also expected in its updated report on the global economic outlook released in July that global inflation rates would soar during 2021, before returning to their normal level in 2022.

On Egypt, the IMF projects inflation to jump to 6.6 per cent in the current 2021-22 fiscal year, increasing from 4.6 per cent in 2020-21, and then to soar to 6.9 per cent in 2022-23, which exceeds the 2019-20 level when the inflation rate posted 5.7 per cent.

In its report on the completion of Egypt’s stand-by arrangement programme released in late June, the IMF stated that the CBE’s data-driven approach to monetary policy had helped to anchor inflation expectations, adding that Egypt’s inflation rate remained below the CBE’s target range, providing scope for monetary policy to further support the recovery as warranted by inflation and economic developments.

It also said that continued progress on strengthening the monetary framework would support monetary transmission. Two-sided exchange-rate flexibility was essential to absorbing external shocks and maintaining competitiveness, the IMF said.

The MPC will hold three further meetings through the end of 2021 to review key interest rates. The upcoming meeting is scheduled for 16 September.

*A version of this article appears in print in the 5 August, 2021 edition of Al-Ahram Weekly

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