The Central Bank of Egypt’s (CBE’s) Monetary Policy Committee will meet eight times in 2017 to determine the future of the bank’s return rate, which is considered the primary, short-term indicator for the direction of the interest rate on the Egyptian pound in banks operating in the domestic market.
The meetings are scheduled to take place on 16 February, 30 March, 18, May, 6 July, 17 August, 28 September, 16 November, and 28 December.
The CBE raised its basic interest rates three times in 2016. On 17 March, it went up by 1.5%; on 16 June by 1%; and on 3 November by 3%, accompanied by the decision to float the Egyptian pound.
According to the Monetary Policy Committee of the CBE, these three moves came with the aim of containing inflation and controlling the commodities’ price increase, especially after the decision to devaluate the pound in 14 March 2016 by about EGP 1.12 and after the decision to fully float it on 3 November 2016.
The basic interest rates started in 2016 at 9.25% for depositing, 10.25% for lending, and 9.75% for the CBE’s main operation. On 3 November, these rates reached 14.75%, 15.75%, and 15.25%, respectively.
Analysts told Daily News Egypt that the direction of the interest rate on the Egyptian pound in 2017 depends on the direction of the inflation rate in the next months, as well as on the government’s strategy in the next period.
Last Tuesday, the CBE announced that the annual core inflation rate increased by the end of December to its highest rate since 2005, registering 25.86%, compared to 20.73% in November—an increase of 5.13%. As for the monthly inflation rate, it registered 4.35% in December, compared to 5.33% in November. The Central Agency for Public Mobilization and Statistics (CAPMAS) said that the Consumers Price Index increased to 23.27% by the end of December, compared to 19.43% in November, while the monthly inflation rate registered 3.13% in December, compared to 4.85% in November.
In a report issued on Wednesday, the World Bank said that priority in the coming period has to be given to the CBE gradually reducing the inflation rate, and to guarantee that the application of the value-added tax will not cause the inflation rate to increase except for once, in order to avoid falling into an inflationary vicious cycle.
Since the Monetary Policy Committee was established in 2005, the CBE has put price stability and inflation containment as major goals, as stipulated in the Banking Law No. 88 of 2003.
According to Osama El-Manialawy, assistant general manager of the finance department in a private bank, the CBE is in a very difficult position regarding determining the future of the interest rates on the Egyptian pound.
He explained that the CBE is required to raise interest rates on the pound to control the increase in commodity prices and to contain the inflation and its negative impacts on citizens. In parallel, it is required not to raise the interest rate in order not to affect the return rate on debts of government borrowing, which it uses to cover the budget deficit. Hence, the deficit and domestic debt would not be influenced.
If the inflation rates continue to increase at the same pace like the last three months, the CBE may be forced to increase the pound’s interest rate by 2%. However, if the inflation stabilises and does not register other significant increases, fixing the interest rate would be more likely, according to El-Manialawy.
He added that if the Monetary Policy Committee fixes the CBE’s basic interest rates in its next meeting, it may be a significant indicator that the government believes in an upcoming decline in commodity prices and inflation rate. Consequently, the interest rate need not increase even more.
He also said that the Ministry of Finance indicated that the direction of the interest rates on the Egyptian pound will tend to decline in the next period, as it reduced the size of its long-term borrowing through treasury bonds and intensified borrowing through the short-term treasury bills. This is a strong indicator that the government is sure that local interest rates will decline in the short-term.
El-Manialawy wondered whether the government will increase the return of savings certificates again like on 3 November to compensate the savers for the harm they had suffered due to the increase in inflation or whether that scenario will not be repeated again.
According to Tamer Youssef, head of treasury sector in a foreign bank operating in the local market, the inflation rate is expected to reach its highest rate by the end of January, as by then the market will have already contained the last effect of the pound’s flotation decision on commodity prices, and there will not be other reasons leading to more price increases on the short-term.
He added that based on these expectations, the CBE may increase its interest rates in the first meeting of the Monetary Policy Committee this year, which is decided to be held in February. The interest rates are expected to be raised by 1-2%.
With regard to the effect of raising the pound’s interest rates again on the budget deficit and the local debt, Youssef said that the government may be forced to pay high interest rates on treasury bills and bonds offered to bridge the budget deficit for three or six months. After that, the interest rates will decline again.
He added that the government will sacrifice a little to achieve a bigger goal, which is controlling the exchange market and attracting foreign investors to invest in high interest rate government debt instruments; however, that sacrifice will not last for long.
This increase is expected to be the CBE’s last increase in the pound’s interest rate, if it succeeds to control the exchange market and the inflation rate, Youssef stated. After this increase, the CBE will fix the interest rate for a while before decreasing it again starting from the second half of this year to help the government execute its expansionary policy which targets to increase the size of local and foreign investment and support growth. This will not be achieved except through decreasing the interest rates again, according to Youssef.
He expected the basic interest rates at the CBE to reach 12%, compared to 14% now.
In a report issued on Wednesday, the World Bank expected the Egyptian economy to register a growth rate of 4% in the current fiscal year (FY) 2016/2017—a decline of 0.2% compared to its expectations announced in June 2016.
It also expected the Egyptian economy to register a growth rate of 4.7% in the coming FY 2017/2018—an increase of 0.1% compared to its expectations announced in June 2016.
Egyptian Minister of Finance Amr El-Garhy announced earlier that the government is targeting to increase the annual growth rate to 5% during the next fiscal year.