The CBE’s waiting game on rates

Doaa Abdel-Moneim, Tuesday 7 Feb 2023

The Central Bank of Egypt has opted to keep interest rates unchanged to give the market a chance to digest the effects of the hikes it introduced last year, writes Doaa Abdel-Moneim

The CBE defied expectations and kept rates stable
The CBE defied expectations and kept rates stable photo: AP


In its first meeting of 2023, held last week, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to maintain its key interest rates of 16.25 per cent for deposits and 17.25 per cent for lending.

The decision came as a surprise as it defied expectations of another hike in rates following recent moves made by the world’s major central banks. The US Federal Reserve has recently raised rates by 0.25 per cent, and the Bank of England and European Central Bank have both hiked rates by 0.5 per cent.

HC Securities and Investment was one of the few investment firms in Egypt that expected the CBE would keep the current interest rates unchanged. Speaking to Al-Ahram Weekly, financial analyst and economist at HC Securities Heba Mounir said that the decision was to allow the market to absorb the effects of the three per cent hike the MPC applied in December.

Seconding this opinion, Monsef Morsi, co-head of research at CI Capital, explained that the decision not to move the rates stemmed from the impacts of the actions the CBE had taken in 2022, including an eight per cent rise in interest rates and a four per cent rise in the banks’ reserve requirements.

In its mid-December meeting, the MPC increased key interest rates by three per cent in one go, bringing the increases introduced over the course of 2022 to a total of eight per cent.

A statement by the MPC following the decision to keep the rates steady last week noted that the eight per cent hikes over the last year, five per cent of which were in the fourth quarter, should counter inflationary pressures.

Inflation in Egypt has been following an upward trend, and it reached 21.3 per cent in December, its highest level in five years.

HC Securities expects inflation to continue its acceleration through the first half of 2023, reaching 23.5 per cent by July before retreating by the end of the second half of the year to 18.2 per cent in December and averaging 21.5 per cent.

The MPC statement noted that maintaining tight monetary conditions was a necessary condition to achieve the CBE’s upcoming inflation targets and price stability over the medium term, indicating that further hikes could be applied over the coming seven meetings of the MPC scheduled for 2023.

The CBE is projected to introduce a total hike of two per cent over the forthcoming four meetings scheduled until the end of the current 2022-23 financial year that ends on 30 June, according to Morsi.

Morsi said the CBE was expected to announce a rise in rates at the MPC’s upcoming meeting scheduled for 30 March, mainly driven by rising inflation and the depreciation of the Egyptian pound.

In a bid to address the inflationary wave domestically and mitigate the pressure on the pound, last month the National Bank of Egypt (NBE) and Banque Misr issued new deposit certificates (CDs) with annual yields of 25 per cent and a 22.5 per cent monthly return, the highest yield on saving certificates ever offered in Egypt.

The two banks stopped issuing the CDs after collecting over LE400 billion over the course of six weeks. Morsi ruled out the state-run banks issuing new CDs with yields exceeding 25 per cent as a tool to address soaring inflation.

“These CDs are a significant burden on the banks’ budgets,” he said.

On the foreign-exchange front, Morsi predicted that the pound would continue to experience significant fluctuations against the dollar, as Egypt started to apply a flexible foreign-exchange regime in December, before easing to more stable rates during the current half of this year.

Performing at its lowest level since March, the pound has depreciated by over 100 per cent so far, with the dollar trading currently for over LE30 compared to about LE15.5 prior to the onset of the war in Ukraine last March.

Following a downgrade by the International Monetary Fund (IMF) of Egypt’s real GDP growth in 2023 by 0.4 per cent, ratings agency Fitch Solutions projected this week that Egypt’s real GDP growth would moderate to three per cent in 2023 with a higher inflationary wave anticipated over the year.

The IMF is scheduled to conduct the first review of its $3 billion loan programme for Egypt, which started in December, by mid-March, paving the way for disbursing the second tranche of the loan worth $347 million by the end of March.

Under the 46-month IMF-backed programme, the CBE has pledged to adopt a tightening policy regarding interest rates and a flexible foreign-exchange regime.

The CBE will also monitor inflation through a Monetary Policy Consultation Clause in the agreement with the IMF, which will trigger consultations with IMF staff when annual headline inflation falls outside the CBE’s inflation target of seven per cent (±2 per cent).

* A version of this article appears in print in the 9 February, 2023 edition of Al-Ahram Weekly

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