With the Russian-Ukrainian conflict continuing to weigh heavily on the economy and the supply of hard currency, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene on 18 August for the fourth time this year and the third time since the onset of the war in Ukraine to review key interest rates.
Executive Director at investment bank HC Securities and Investment Monette Doss said she expected the CBE to hike key interest rates by two per cent, as Egypt’s July inflation readings had come in higher than expected.
Egypt’s annual headline inflation rose to 14.6 per cent in July, more than double in the same month last year and up from 13.2 per cent in June.
Doss expects Egypt’s inflation rate to average 14.2 per cent over the rest of 2022, well above the CBE’s target of seven per cent (+/- two per cent).
Ullas Rao, an assistant professor of finance and programme director for finance at the Edinburgh Business School of the Heriot-Watt University Dubai, told Al-Ahram Weekly that the CBE was likely to raise key interest rates by two per cent in a bid to curb inflation that is anticipated to continue to accelerate through the end of the year, with one estimate putting the figure at 17 per cent in October.
In its last meeting in June, the MPC decided to keep key interest rates unchanged for the first time since the onset of the Ukraine war. The CBE’s overnight deposit rate, overnight lending rate, and rate of main operations currently stand at 11.25 per cent, 12.25 per cent, and 11.75 per cent, respectively. The discount rate was also kept unchanged at 11.75 per cent.
The MPC said that developments stemming from the Russian-Ukrainian conflict were among the exogenous shocks outside the scope of monetary policy that could nevertheless lead to transitory deviations from pre-announced target rates.
The CBE has hiked key interest rates by a total of three per cent (300 bps) since March this year. Ongoing challenges are putting pressure on Egypt’s balance of payments, and this is likely to drive the CBE once again to hike interest rates, Doss said.
Egypt’s 2021-22 fiscal year current account deficit has widened to 4.8 per cent of GDP, up from 4.6 per cent a year earlier, she said. Remittances from Egyptian expatriates abroad declined in April by seven per cent compared to the month before to post $3.1 billion. Foreign currency deposits not included in the official reserves fell to $0.89 billion in July, down from $11.2 billion in December.
Net international reserves settled at around $33 billion in July, Doss said. They stood at around $41 billion in December.
The Egyptian pound has lost over 20 per cent of its value against the US dollar since March, trading at around LE19 per dollar on Tuesday. Doss said that a two per cent interest-rate hike together with an estimated nine per cent currency devaluation to reach around LE21 per dollar was necessary to support the currency.
“The CBE has to raise interest rates to support the Egyptian pound further and to combat dollarisation,” said banker Tarek Metwalli.
He told the Weekly that the banks should issue high-interest certificates to attract savings in pounds. “This would prevent deposit holders from withdrawing their money to buy dollars,” he said.
The National Bank of Egypt and Banque Misr issued temporary 18 per cent certificates following the devaluation of the currency in March. They later introduced 14 per cent savings options along with other banks.
The higher interest rates are also seen as warranted in order to continue to attract indirect portfolio investment in Egyptian debt instruments. Global investors have been fleeing the emerging markets to capitalise on the higher rates offered by the US central bank the Federal Reserve, which has been raising interest rates aggressively to around 2.5 per cent.
But Rao said that rising interest rates would also mean a higher cost of loans, putting pressure on the investment climate. Growing fears of faltering global economic growth would mean that Egyptian exports could not capitalise on their competitive advantage of being cheaper because of the depreciating currency, he added.
“An easing of supply-chain woes alongside a dialling down of the ongoing geopolitical rhetoric remain essential for the Egyptian economy to realise economic gains going forward,” Rao said.
*A version of this article appears in print in the 18 August, 2022 edition of Al-Ahram Weekly.