Interest rates in the balance

Doaa A. Moneim, Thursday 1 Feb 2024

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is to hold its first meeting for 2024 on Thursday to review key interest rates amid unprecedented economic challenges. The CBE’s next move on interest rates is unpredictable.

Interest rates in the balance


Analysts’ expectations vary regarding the MPC’s anticipated decision on whether it will maintain current key interest rates unchanged or hike them to contain inflationary pressures.

Banking expert Ahmed Shawky expects the MPC to keep the current key interest rates unchanged, as he believes the tightening of monetary policy has so far failed to curb soaring inflation.

He expects inflationary pressures to persist amid the ongoing global and regional tensions, he told the Weekly.

Egypt’s annual headline inflation decreased to 33.7 per cent in December, considerably lower than the around 38 per cent recorded in September. However, these readings remain far from the target of five to nine per cent set by the CBE.

In 2023, the CBE raised key interest rates by a total of three per cent (300 bps) to stand at 19.25 per cent, 20.25 per cent, and 19.75 per cent for the overnight lending rate, the rate of the main operation, and discount rate, respectively. The overnight deposit rate is also at 19.75 per cent.

Since March 2022, the CBE has hiked key interest rates by a total of 11 per cent (1100 bps).

Shawky explained that any further hike in interest rates will increase financial burdens for borrowers and raise the cost of commodities and other products in the local market.

He said that raising the current interest rates would mean higher costs for the Government in the shape of the interest payments it makes on treasury bills. A one per cent increase in interest rates increases debt-servicing costs cost by about LE70 billion, Minister of Finance Mohamed Maait has said.

HC Securities and Investment, an investment bank, also predicted that the MPC would keep the current interest rates on hold. “We expect the MPC to maintain the overnight deposit and lending rates at the upcoming meeting in the absence of a foreign-exchange rate movement,” said HC financial analyst Heba Monir.

Monir expects the MPC to hike the current rates if a devaluation of the Egyptian pound against the US dollar takes place.

“We anticipate an adjustment in the foreign-exchange rate after concluding the International Monetary Fund’s (IMF)’s delayed first and second reviews and reaching an agreement with the Fund on doubling if not more the value of the $3 billion Extended Fund Facility (EFF)” that Egypt has with the IMF, Monir said in a note.

The local market is anticipating a fourth wave of devaluation of the Egyptian pound against the US dollar following the three waves seen since March 2022. As a result, the local currency has lost over 50 per cent of its value against the dollar amid an active parallel currency market.

The pound is now trading at around LE60 per dollar on the parallel market, while the official rate is stable at around LE31. A hike in interest rates often accompanied past devaluations and encourages people to hold onto their pounds in the form of savings certificates to prevent dollarisation.

Estimates for the value of the pound following a devaluation vary. While the ratings agency Standard & Poor’s expected this week that the depreciation could be close to the unofficial market rate, Fitch Solutions expected the pound to settle at between LE40 to LE50 per dollar.

An IMF mission is currently in Egypt holding discussions with the authorities regarding pushing forward the loan deal signed in December 2022. The mission is also discussing a possible additional financing package for the country as it faces the ramifications of the war in Gaza.

“Additional financing will be critical to ensure successful programme implementation,” Head of the Communications Department at the IMF and Spokesperson for the Fund Julie Kozack told the Weekly in January, adding that details of the approval of the additional amount would be announced in due course.

The IMF downgraded its projections for Egypt’s real GDP growth in 2024 and 2025 to three per cent and 4.7 per cent, respectively, down from the 3.6 per cent and five per cent it had expected in October, according to the World Economic Outlook (WEO) Report the Fund released this week.

Beltone Holding, an investment firm, expects the MPC to hike the current interest rates by two per cent (200 bps) at its next meeting, seeing this as the only tool the CBE has to curb the high inflation.

Inflation in Egypt is expected to increase over the coming months, as the month of Ramadan approaches, head of research at Beltone Ahmed Hafez told the Weekly.

Inflation could be fed further by the new school semester and the expected rises in the cost of services and commodity prices that could take place as a result of Government actions in the wake of a deal with the IMF on an additional financing package.

The IMF is advising a comprehensive policy that is meant to tackle the imbalances of the budget, chiefly the budget deficit, which is addressed by boosting revenues through increases in the prices of services.

In addition, the ongoing $3 billion loan deal with the Fund requires adopting a flexible regime for both interest rates and the exchange rate, which would feed the inflationary wave in the country.

Hafez highlighted the recent statements by the IMF’s Managing Director that curbing inflation is a priority for Egypt, explaining that this would be reflected in the expected decision of the MPC at the incoming meeting.

Egypt’s annual headline inflation is set to rise to 36.3 per cent on an annual basis, HC forecasts, as a result of factoring in higher metro ticket prices, telecom prices, and household electricity prices, as well as the increased money supply resulting from the maturity of high-yielding certificates of deposit (CDs) issued in January 2023.

The effects of the latter the Government tried to absorb by issuing one-year CDs from Banque Misr and the National Bank of Egypt (NBE) at an interest rate of 23.5 per cent paid monthly and 27 per cent paid annually.

Hafez projects that the MPC will hike the current interest rates by a total of three per cent (300 bps) over the course of 2024.

* A version of this article appears in print in the 1 February, 2024 edition of Al-Ahram Weekly

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