Egypt’s two biggest public sector banks, National Bank of Egypt (NBE) and Banque Misr (BM), have raised interest rates on their Egyptian pound three-year certificate of deposits (CD) to reach 11.5 per cent from the current 9.5 per cent, effective 1 November.

This increase comes despite the Central Bank of Egypt's (CBE) decision to keep its benchmark interest rates on hold after its monetary policy meeting in October.The overnight lending and deposit rates remained unchanged at 9.75 per cent and 8.25 per cent, respectively. There has been no change in either of the rates since 17 September, 2009.

Beltone Financial, a leading Cairo-based investment house, said in a note issued today that the purpose of the move is to boost demand on the local currency through boosting attractiveness of its yields. CBE data shows that Egyptian pound deposits flow remained flat in the nine months up to September 2011, while foreign currency deposits have grown by 12 per cent.

The Egyptian government has been borrowing heavily from the local market, mainly banks, at increasingly growing yields, the highest since 2008.

"We foresee an upward adjustment in yields on treasury bills and bonds, especially that recently it has been the public sector players who have been the main buyers of the government debt." The note by Beltone read.

On Monday, Egypt's central bank sold LE5 billion (US$837.55 million) in domestic treasury bills on Sunday, the same amount it had offered, the Finance Ministry said. The average yield for the 91-day T-bills rose to 12.298 per cent from 12.242 per cent at last week's auction. Average yield on the 273-day Tbills also rose to 13.84 per cent from 13.625 per cent at the last issue on 18 October.

Beltone indicates that not all private sector banks will follow through on this move, as individual strategy and liquidity pressures in each bank would be the key determinant for such a decision.

Overall, the effect would not be strong on banks as depositors do not favour long-term instruments, Beltone suggests.

"We do not see an immediate negative effect, if any, on net interest margins because of this move; however, we have already been anticipating a squeeze in margins in 2011 as a whole on slower business activity," the investment bank indicates.