Higher rates ahead?

Doaa A. Moneim, Tuesday 20 Sep 2022

Doaa A. Moneim examines prospects for a new hike in interest rates

Higher rates ahead


The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is scheduled to convene on Thursday to review key interest rates amid expectations that it could hike rates by up to two per cent (200 basis points, bps) in response to rising domestic and international inflation caused by the ongoing war in Ukraine.

There are also expectations that the MPC could take action in response to the further depreciation of the Egyptian pound against the US dollar.

This week’s meeting is the sixth so far in 2022, the fifth since the onset of the Russian war in Ukraine and the second to be held under the chairmanship of CBE Acting Governor Hassan Abdallah.

In its last meeting, held in August, the MPC kept interest rates unchanged, with the CBE’s overnight deposit rate, overnight lending rate, rate of main operations, and discount rates maintained at 11.25 per cent, 12.25 per cent, 11.75 per cent, and 11.75 per cent, respectively.

Investment bank HC Securities and Investment expects the CBE to raise key interest rates by one per cent (100 bps) on Thursday and to introduce another one per cent rise by the end of 2022.

Egypt’s inflation rate in August was the highest recorded since May 2019, with the pricing of imported commodities at a higher exchange rate and supply bottlenecks driving up domestic prices, Heba Mounir, an economist at HC Securities, told Al-Ahram Weekly.

At these levels, the annual inflation rate is well above the CBE’s pre-announced target of seven per cent (± two per cent), she said, adding that HC estimates it will average 14 per cent until the end of the year.

According to data published by the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s annual urban inflation rate rose in August to 14.6 per cent, up from 13.6 per cent in July.

The government has recently amended the natural gas pricing formula for nitrogen fertiliser producers, which will affect crop prices and accordingly inflation, Mounir said.

She noted that the pressure in terms of Egypt’s external position is accumulating, driven by the increase in the current account deficit for the 2021-22 fiscal year.

This rose to 4.8 per cent of GDP, up from 4.6 per cent a year earlier, as a result of the decline of expatriate remittance inflows in July by $2.38 billion and a drop in foreign currency deposits, not included in the official reserves, to $0.89 billion in August from $11.7 billion in December.

The CBE’s net international reserves stood at $33.1 billion in August, covering 4.7 months of imports.

Mounir said that Egypt’s external debt repayment schedule shows dues of $12.1 billion during the current fiscal year.

Head of research at Prime Holding Amr Al-Alfi also expected the MPC to hike key interest rates by a total of two per cent through the end of 2022 with a rise of one per cent projected on Thursday.

He said that the expectations are driven by a projected jump in inflation going forward and the foreseen further weakness of the Egyptian pound.

But Al-Alfi expects the CBE to lower key interest rates in 2023, as inflation is projected to return to single digits as of the second quarter of 2023.

Head of research at Pharos Holding Radwa El-Swaify said she expected the MPC to hike key interest rates by two per cent on Thursday. “Hiking the rates would alleviate the pressure on hard currency in the local market by attracting investments to local debt instruments,” she explained.

Hiking interest rates would be the natural response of the MPC, especially if the CBE intends to liberalise the exchange rate, she told the Weekly, adding that the hike in rates would put further pressure on the state budget.

In August, Minister of Finance Mohamed Maait said that $22 billion in foreign investment had left the local market since the beginning of 2022. He said that Egypt was no longer dependent on this sort of investment as a source of hard currency.

The MPC has hiked Egypt’s key interest rates by a total of three per cent (300 bps) since the onset of the Russian war on Ukraine and has allowed the pound to depreciate against the US dollar by over 20 per cent to reach its lowest level since the implementation of Egypt’s economic reform programme in late 2016.

On Monday the US dollar was officially trading at LE19.4 to the pound and had reached LE22.5 on the unofficial market.

   *A version of this article appears in print in the 22 September, 2022 edition of Al-Ahram Weekly.

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