The first week following the interest rate reduction decision by the Central Bank of Egypt (CBE) saw a limited response by banks. The interest rate cut in a large number of banks was only limited to variable yield savings certificates, while a few banks reduced interest rates on some of their other savings accounts and deposits.
Interest rate on thirty 3-and-5-year saving certificates issued by 24 banks declined on Sunday in a quick response to the decision to cut interest rates, where the pricing of these certificates is linked to the CBE’s basic interest rates.
In the National Bank of Egypt (NBE), Egypt’s largest bank, the yield of the variable-yielding tripartite certificate fell only to reach 16% from 17%. The yield on this certificate is paid every three months. The bank kept the yield on the tripartite certificate with a fixed return at 15% disbursed monthly or 15.25% on certificates of fixed yield disbursed quarterly.
The NBE’s assets and liabilities committee also decided in the meeting on Sunday to fix interest rates on savings accounts and deposits for further study and calculation of the bank’s liquidity cost, in return for the cost burden on such savings.
For its part, Banque Misr, the second largest bank operating in Egypt, decided to cut interest rates on its variable yield savings certificate linked to the CBE’s basic interest by 1% to 16% from 17%.
Most of Banque Misr’s liquidity is concentrated in savings certificates owned by individuals, while companies hold the largest share of deposits.
Banque Misr also decided to reduce the interest rate of the current account with a daily yield (VIP) by 1% and reducing 6-month or more deposits’ interest rates by about 0.5%.
Interest on the first tranche of the day-to-day account at Banque Misr, which begins from EGP 1m to EGP 2m, dropped to 7.25% from 8.25%. The interest on the second tranche of EGP 2-10m was cut to 7.75% from 8.75%.
Interest on the third tranche between EGP 10m and EGP 30m recorded 8.25% down from 9.25%, while that on the fourth tranche from EGP 30m to EGP 100m was cut to 8.25% from 9.75%. The interest rate on the fifth tranche from EGP 100m and above was cut to 10% from 11%.
Al Watany Bank of Egypt cut interest rates on savings accounts and deposits by 1 and 1.25%, while keeping the yield on its savings certificates unchanged.
In the same context, the United Bank of Egypt decided to reduce the interest rate by 1% on the bank’s fixed-income certificates for three and five years, and kept interest rates on remaining savings unchanged.
In the National Investment Bank (NIB), the interest on fixed-return investment certificates remained unchanged at 15.75%.
The bank offers these certificates through the branches of the NIB of Egypt, with a period of one year only, and the proceeds are paid on a monthly basis. It is now the highest yielding saving certificate in the market.
In Al Baraka Bank Egypt, interest rates were cut by 1% across all deposits.
Simultaneously, AlexBank cut interest rates on the Alex Gold saving certificate to 13.75% down from 14.75%. The yield is disbursed on a quarterly basis for three years. The interest rate on the Alex Gold Prime certificate fell to 13.5% from 14.5%. The yield is disbursed on monthly basis for three years.
The Egyptian Arab Land Bank also decided to cut interest rates by 1% on the VIP deposits while it kept the rates on other clients’ deposits fixed, as well as the rate on saving accounts and certificates of fixed income.
Misr Iran Development Bank has decided to cut the interest rate on its savings and deposits accounts by 1%. The bank has also decided to discontinue the three-year fixed-yield certificate, which gives a 14.5% annual return on a temporary basis until a decision is made on the return.
The bank’s variable interest rate was down by 1% to reach 16%.
Meanwhile, in the Arab Bank, the interest rate was reduced by 1% on the three-year fixed-yield savings certificates to 14% for the monthly return, and 13% for the daily return, while the bank decided to keep the savings accounts unchanged.
The interest rate on the variable-yield bank certificates was down to 15.25% from 16.25%.
Likewise, the loans associated with the CBE’s basic interest rates were impacted by the decision, while banks excluded other loans from the decline for now.
According to Tarek Metwally, Former deputy managing director and executive board member of BLOM Bank-Egypt, interest rates in the Egyptian market are still high. “The recovery of bank lending needs interest rates to reach 9-11%,” he added.
Metwally continued to say that the rate cut by the CBE is a step in the right direction, but its effect will not be large on credit during the current period, and he expected further cuts in interest rates by the end of this year.
For his part, an official at a private bank ruled out banks’ tendency to reduce interest rates on lending at the moment, citing the high cost of funds with banks, especially as there is a general tendency in the banking sector not to reduce interest rates on fixed-rate certificates.
He stressed that banks will not cut interest rates on loans until their monetary costs fall.
In a related context, the yield of treasury bills (T-Bills) and bonds (T-Bonds) raised by the ministry of finance last week decreased by less than 1%, where the ministry resorted to reducing the volume of liquidity received by some bids in order to avoid paying high interest.
The interest rate accepted by the ministry of finance on T-Bills offered by the CBE on its behalf fell on Sunday, reaching a minimum of 17.248% and a maximum of 17.528% for 91 days, averaging 17.453%, against 17.9%, 18.36%, and 18.202% in a similar bid posed on 10 February 2019, down by 0.625 – 0.832%.
On Sunday, the finance ministry also offered another tender for T-Bills spanning 273 days worth EGP 8.5bn.
The interest rate accepted on this tender fell to a minimum of 17.5% and a maximum of 17.8%, averaging 17.686%, against 17.849%, 18.45%, and 18.296% in a similar bid posed on 3 February 2019, marking a decline of 0.349 and 0.65%.
On Monday, T-Bonds yields were also down by between 0.65 and 0.89%.
On Monday, the CBE, on behalf of the ministry of finance, put forward a tender for a term T-Bonds of three years worth EGP 1bn.
On Monday, the CBE also floated another tender for 7-year T-Bonds worth EGP 750m.
The interest rate accepted by the ministry of finance on T-Bills offered by the CBE on its behalf fell on Thursday, reaching a minimum of 17.2% and a maximum of 17.451% for 182 days, averaging 17.373%, against 18.1%, 18.611%, and 18.53% in a similar bid posed on 12 February 2019, down by 1.1 – 1.16%.
OnThursday, , the CBE, on behalf of the ministry of finance, also offered another tender for T-Bills spanning 357 days worth EGP 8.5bn.
The interest rate accepted on this tender fell to a minimum of 17% and a maximum of 17.139%, averaging 17.104%, against 18.144%, 18.259%, and 18.182% in a similar bid posed on 12 February 2019, marking a decline of 1.078 and1.144%.
According to Metwally, each 1% drop in interest rates saves the ministry of finance some EGP 30bn in service of the domestic public debt, which enables it to control the budget deficit.
He pointed out that inflation should be curbed in the coming period and to continue the facilitation policy initiated by the CBE to promote economic growth and increase the demand for borrowing.
“I think that the interest rate will not affect the inflow of foreigners towards debt instruments, as the current level of interest is still the highest in the world, which makes Egypt attractive to foreign investments in debt instruments,” proclaimed Metwally.
The government has revealed its intention to reduce the interest rate of public debt, both internal and external, to EGP 502bn, which accounts for 33% of total spending, according to the draft general state budget for the fiscal year (FY) 2019/20, against EGP 541bn, accounting for 37.8% of total spending in the current FY.
Furthermore, the government intends to achieve this target by cutting interest rates, setting a strategy to reduce the budget deficit, and imposing a ceiling to reduce public debt.
The monetary policy committee of the CBE decided in its meeting on Thursday, 14 February 2018, to reduce interest rates by 1% to 15.75% for deposits, and 16.75% for lending, and 16.25% for the price of main operations, discounts, and credit.
According to the Beltone Investment Bank, the CBE’s decision to cut interest rates despite the slight increase in inflation in January 2019 will pave the way for a new rate cut in the first half (H1) of 2019 before implementing the mechanism of automatic pricing of fuel prices.
Investment bank Arqaam Capital Limited predicted a rate cut between 4% and 5% this year, based on several reasons: the expected increase in the interest margin on the bonds and bills and rates of return at the CBE, which means the continuation of the high interest environment, in addition to financial markets no longer expecting further tightening of US interest rates.
It expected that most of the reduction in interest rates will come in H2 of the year, in preparation for the pressures that may arise from the application of fuel price mechanism on gasoline 95.
It said that Egyptian T-Bills are still attractive to foreign investors, as a result of the appreciation of the pound and the existence of expectations to increase its price by about 5% to change hands at EGP 17.5-18 in average this year, and then lose 5%-7% of its value in one and a half year.
However, it noted that T-Bonds are less attractive, especially after taxes and the cost of sovereign debt insurance, but they will become attractive if inflation falls to 9% and the CBE realising its targets by 2020.
Moreover, it pointed out that Egypt is the third largest country to offer high returns on government debt securities of 15%, against 17% in Turkey, and 24% in Brazil, while the cost of sovereign debt insurance is higher by 1% from Turkey, and 2% from Brazil.