Egypt's interest rate hikes on hold?

Doaa A. Moneim, Wednesday 2 Aug 2023

The Central Bank of Egypt is likely to maintain interest rates at their current level at its meeting this week

Source: CBE
Source: CBE


The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is set to convene on Thursday to review key interest rates in the light of the latest local and global economic developments amid expectations that it will keep the current rates unchanged.

This is the fifth meeting of the MPC this year. Over its last four meetings, the CBE has held interest rates steady three times and raised them once by two per cent, bringing total hikes since March 2022 to 10 per cent.

The current overnight deposit rate, overnight lending rate, rate of main operations, and discount rate are 18.25 per cent, 19.25 per cent, 18.75 per cent, and 18.75 per cent, respectively.

Banking expert Hani Abul-Fotouh believes the CBE will maintain the current interest rates despite the inflationary pressures reflected by June’s inflation readings in order to have room to assess the impacts of the hikes it has applied so far.

Egypt’s inflation rate has been on the rise this year, reaching an all-time high in June. According to the latest figures published by the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s headline annual inflation hit 36.8 per cent in June, compared to 34.8 per cent in May.

CAPMAS ascribed this significant increase to the rise in the prices of foodstuffs and beverages, which increased by 64.9 per cent on an annual basis in June. Moreover, annual core inflation, as calculated by the CBE, rose to 41 per cent in June, up from 40.3 per cent in May.

Meanwhile, the International Monetary Fund (IMF) raised its projections for Egypt’s inflation in 2023 and 2024 to 24.4 per cent and 32 per cent, respectively, up from 21.6 per cent in 2023 and 18 per cent in 2024 as projected in April.

The CBE must use new instruments to contain inflation as per its target without either affecting the financing costs of the government or the costs for other borrowers, Abul-Fotouh said.

The CBE has set inflation targets at seven per cent (± 2 per cent) on average by the fourth quarter of 2024 and at five per cent (± 2 per cent) on average by the fourth quarter of 2026. These targets are in line with Egypt’s commitments under its $3 billion loan deal with the IMF.

This week’s MPC meeting comes a week after the major banks in Egypt issued two high-yield dollar-denominated certificates of deposit (CDs) with a three-year maturity.

The state-owned National Bank of Egypt (NBE) and Banque Misr issued the CDs with seven and nine per cent annual yields, while the Arab African International Bank (AAIB) issued the same type of CDs but with a 40 per cent yield that could be paid upfront.

The CDs are mainly directed at Egyptian expats who will receive their yields in dollars and are also allowed to secure loans, guaranteed by the CDs, with instalments also paid in dollars.

The actions are in line with the plan that Prime Minister Mustafa Madbouli announced in July that targets replenishing the dollar liquidity in the Egyptian market to $191 billion through 2026 in a bid to tackle the US dollar shortage the country has been suffering from.

The issuance of the CDs is part of a bid to attract dollars from Egyptian expats and Egyptians inside the country, especially with the decline in Egyptian expats’ remittances over the 2022-23 fiscal year to $17.5 billion, down from $23.6 billion in 2021-22, and falling by over 26 per cent, Abul-Fottouh said, adding that the CDs should attract dollar holders, as they offer various yields while keeping the principal sum intact.

Head of research at investment firm Zilla Capital Aya Zoheir expects the CBE to maintain the current interest rates.

“Introducing a new hike to the current key interest rates will be based on a fresh devaluation of the Egyptian pound against the US dollar, which is not expected to occur before the fourth quarter of 2023,” Zoheir told Al-Ahram Weekly.

According to Zoheir, the challenge before the government is to tackle the shortage of dollars and not to contain inflation.

For this reason, several banks issued the new high-yield dollar CDs last week, she explained. The action also avoids raising interest rates on the Egyptian pound by increasing dollar reserves in the banking sector, Zoheir said.

HC Securities and Investment projects Egypt’s inflation to rise by two per cent monthly and to hit 36.6 per cent on an annual basis in July 2023 as supply shortages caused by the curbing of imports and the lack of dollar availability continue to lead to inflation spikes.

CAPMAS and the CBE are scheduled to release July’s inflation readings next week.

* A version of this article appears in print in the 3 August, 2023 edition of Al-Ahram Weekly

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