The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) is scheduled to convene on 16 December to review key interest rates in the light of recent macroeconomic updates at the global and local levels.
This will be the eighth and final time the MPC reviews interest rates in 2021 amid expectations that it will maintain them without change despite rising global inflation and the challenges posed by the Covid-19 pandemic and its new variants.
In its last meeting, held on 28 October, the MPC kept the overnight deposit rate, overnight lending rate, and main operations rate unchanged at 8.25 per cent, 9.25 per cent, and 8.75 per cent, respectively. The discount rate was also kept unchanged at 8.75 per cent.
The CBE maintained interest rates unchanged throughout the whole of 2021.
Banking expert Ahmed Shawki told Al-Ahram Weekly that he expected the MPC to keep interest rates unchanged at its December meeting, especially since Egypt’s inflation figures are still below the CBE’s target of seven per cent (± two per cent). Interest rates are a monetary policy tool that can be used to rein in inflation.
According to the November figures announced by the Central Agency for Public Mobilisation and Statistics (CAPMAS), the country’s annual headline inflation rate accelerated to 7.3 per cent in October, up from 4.6 per cent in the same month of 2020, but down from eight per cent recorded in September.
Moreover, monthly headline inflation increased slightly in October 2021 by 1.7 per cent, up from September, CAPMAS said.
Shawki said that as long as the inflation rate is under control, GDP is growing, and the value of the Egyptian pound is stable against the dollar, the CBE is not expected to introduce either cuts or increases to interest rates.
In late November, Minister of Planning and Economic Development Hala Al-Said announced that Egypt’s GDP grew by 9.8 per cent during the first quarter of the current fiscal year (2021-22), the highest recorded in the past two decades, compared to 0.7 per cent reached in the corresponding quarter of 2020-21.
Egypt’s annual economic growth rate is projected to approach pre-pandemic levels by the end of the current fiscal year to post between 5.5 per cent and 5.7 per cent, according to the minister. Egypt has the highest real interest rates globally, Shawki pointed out, adding that this has encouraged foreign demand for Egyptian debt instruments.
Director of financial institutions at the US ratings agency Fitch Ratings Zeinab Abdallah supports the probability that the CBE will keep current interest rates unchanged.
Egypt offers one of the highest inflation-adjusted rates of return on emerging market debt, Abdallah told the Weekly, adding that she believes the CBE will seek to maintain attractive real interest rates to retain portfolio inflows given the uncertainty over the recovery of current account receipts and the pressure on the banks’ foreign assets.
Egypt’s banks recorded a net foreign liability position of US$4 billion at the end of September 2021 versus a net foreign asset position of $7 billion at the end of February.
According to Abdallah, foreign holdings of Egyptian treasury bills (T-bills) and bonds reached $34 billion in September 2021 after dropping to less than $10 billion in June 2020. This has helped to finance Egypt’s current account deficit and support its foreign currency reserves, Abdallah said.
Over the medium and long term, Abdallah predicted that interest rates and CBE monetary policy would depend on several factors, including tapering by the US Federal Reserve of the stimulus it provided during the pandemic. CBE monetary policy could also be affected by the Federal Reserve raising US interest rates, which could trigger capital outflows from emerging markets’ higher-risk debt instruments.
“Uncertainty about inflation is another factor. Inflation is currently within the CBE target range; however, there could be upside risks from higher energy and food prices. An erosion of positive real interest rates could result in another wave of sell-offs and capital outflows pressuring foreign-currency liquidity and the foreign-exchange rate,” Abdallah said.
*A version of this article appears in print in the 9 December, 2021 edition of Al-Ahram Weekly.