Several analysts and banking experts expect the Central Bank of Egypt (CBE) to keep the Egyptian pound’s interest rate unchanged during the next meeting of its Monetary Policy Committee (MPC), scheduled on Thursday.
The MPC is set to hold its sixth regular meeting at the end of this week to discuss the future of the CBE’s basic interest rates. This is the most important indicator of the local currency’s interest trend in the Egyptian market in the short term.
At its 25 June meeting, the MPC fixed the basic rates at 9.25% for deposits, 10.25% for lending, and 9.75% for the credit, discount, and main operations in the CBE’s open market.
The MPC said the decision was made in light of the CBE taking a range of measures and initiatives directed at various economic sectors. This was in addition to its reduction of basic interest rates by 300 basis points at its emergency meeting on 16 March.
It indicated its belief that the CBE’s current basic rates are appropriate and consistent with achieving the target inflation rate of 9% (±3%) in the fourth quarter (Q4) of 2020. This would also encourage interest stability in the medium term, the MPC added.
The committee stressed it will closely follow all economic developments and risk balances, whilst not hesitating to use all its tools to support economic recovery, provided that inflationary pressures are contained.
Where is inflation heading?
The local market is awaiting the CBE’s Monday announcement of the latest inflation levels recorded in July 2020.
At the end of June, the monthly inflation, calculated by the CBE, recorded -0.3%, compared to 0.3% in May. The annual rate of core inflation was 1% in June, compared to 1.5% in May.
Meanwhile, the consumer price index for urban consumers (CPI-U) increased to 5.6% in June, compared to 4.7% in May, according to the Central Agency for Public Mobilization and Statistics (CAPMAS).
The agency added, in its monthly inflation report, that the whole country’s CPI inched down to 107.5 points in June, registering a slight decrease of 0.1% from May.
According to CAPMAS, the annual headline inflation recorded 6% in June 2020, up from 5% in May 2020, and 8.9% in June 2019.
Banking expert Mohamed Abdel-Aal said, “May Allah stands with all central banks worldwide, as they have been in a fierce and continuous battle against the repercussions of COVID-19 since the beginning of this year.”
He added, “Here in Egypt, the situation is no different. The CBE, through the MPC, was more persistent and eager to set a strategy to account for different scenarios under various pressure conditions.”
Monetary policy tools
Abdel-Aal explained that the interest rate is one of the most important tools the MPC has, indicating that the committee has gone through two phases. The first began with the onset of the crisis and coincided with the conditions of partial or total shutdown of economic activities. The committee adopted an exceptional and proactive policy, with a one-time substantial cut of 300 basis points in mid-March 2020. The committee has until now remained committed to this level.
He added that this was followed by the announcement of a large and diverse group of financing packages, directed at productive economic sectors and activities. This included subsidised interest rates, less than even the officially announced rates.
This period was also accompanied by another package of monetary, non-monetary and influential facilitations, including the postponement of loan instalments and interest on financing, for specific periods. They also included facilitations for defaulters as they were encouraged to return to dealings. Other initiatives were taken for the tourism sector, alongside financing wages to retain employees.
Long-term stimulation policy
According to Abdel-Aal, the second stage, which is currently being implemented, includes the MPC’s adoption of a long-term stimulation policy. This comes in line with the state’s two-pronged strategy to accelerate growth and help the economy recover.
He added that this phase may be based on a set of actors, linked and complementary to each other, indicating that this policy is long-term.
“In light of the global and local uncertainty, it is not necessary to rush the implementation of incentive cuts to official interest rates, rather, this can be done gradually over a medium–term period of time,” he added.
Abdel-Aal noted that the expected inflation rates in the coming months confirm that stability is expected within the rate targeted by the CBE, which is 9% (±3%) until the end of the current year. He pointed out that there may be marginal changes in the inflation rate, given the balance of components for the most prominent commodities.
However, the rate will remain in single digits and within the limits of the target, which means that the current interest rates are consistent with the expected future inflation rates.
Abdel-Aal added that if this point of view is correct, it may require the continuation and renewal of the financing packages, facilities and procedures that were issued with the onset of the crisis. This would also require a new initiative to stimulate consumption and increase the demand for local products, as all the initiatives that took place in the first phase were to encourage production.
They also required the encouragement of consumption and increasing demand. Abdel-Aal added that there is absolutely no fear from generating harmful inflationary pressures as a result of this initiative, because it is already accompanied by large reductions in commodity prices.
Encouraging household saving
According to Abdel-Aal, in this phase, the MPC enjoys a greater degree of flexibility, which enables it to deal efficiently with various global and local circumstances and variables. It has adopted a stimulus policy in which it supports the financial liquidity of companies and individuals. This has taken place by reducing interest or introducing facilitative measures to support continuation.
At the same time, it gives a green light for some state-owned banks to encourage household savings in the form of saving vessels at special interest rates for one year. It has succeeded in attracting nearly EGP 300bn since its inception, which has stimulated savings and investments. The vessel, which has helped stabilise the exchange rate, has also stimulated consumption and absorbed any signs of unpleasant inflationary pressures.
Abdel-Aal pointed out that the fixed interest rates that have been in place since mid-March were accompanied by a rise in Egypt’s creditworthiness and a stable outlook reported by most international evaluation institutions.
The institutions also anticipate an improvement in all economic and financial indicators, as well as Egypt’s exchange rate stability. Moreover, the new International Monetary Fund (IMF) loan has reinforced these positive balanced indicators about the future of Egypt’s economy.
“In light of all these factors and indicators, we can say that there is evidence that may suggest the MPC may move towards fixing the interest rate at its meeting next Thursday,” Abdel-Aal said. “This is especially as the interest is directed more to stimulate consumption to treat the emergence of any production gaps and preserve the attractiveness of the Egyptian pound to Egyptian expats and foreign investors in government debt securities.”
Moreover, banking expert Tarek Metwally said that there will be factors supporting the possibility of reducing the interest rate, and other factors that support its stabilisation during the next MPC meeting.
He explained that some of those factors include the continuation of the pandemic’s repercussions and the state’s attempts to return to normal life, taking all necessary precautions to prevent the spread of the disease. Moreover, some economic sectors are gradually returning to work, alongside the increase in foreign exchange reserves after the government’s success in sealing the IMF agreement.
The IMF will provide a total of about $8bn, of which $4.77bn has already been delivered, with the rest to be delivered within a year from the date of approval. This is in addition to Egypt’s receiving an international bond offering of $5bn.
Metwally added that among the factors that support the interest rate reduction is the CBE’s keenness to support Egypt’s business sector in conducting business, whilst maintaining employment and production. At the same time, there are saving vessels with a high return available to preserve the family sector, including the 15% certificates offered by the National Bank of Egypt (NBE) and Banque Misr.
“With all this data, and in light of the current inflation rates and low exchange rate, and foreigners investing in government debt instruments, the MPC may have the opportunity to make a reduction in the interest rate,” Metwally said.
On the other hand, he believes that the CBE’s anticipation for greater stability in macroeconomic indicators represent one of the factors supporting a stabilisation of Egypt’s interest rates.
He expects the CBE’s policy of stabilising the interest rate will continue, with a weak possibility of its reduction by only 1% until the end of this year. Next year, global conditions and economic indicators are expected to improve, allowing the CBE to move forward in terms of its monetary management policy.
For his part, banking expert Mohammed El-Beh expects the CBE to fix interest rates during the Thursday meeting.
He noted that, despite the slight increase in inflation rates, which CAPMAS reported stood at 5.6% in cities in June compared to 4.7% in May, the stability of inflation rate remains within the target of CBE at 9% ( ± 3%) until the end of 2020.
He highlighted statements made by Uma Ramakrishnan, head of the IMF’s mission to Egypt, confirming that Egyptian authorities are committed to maintaining a low and stable inflation rate. At the same time, Ramakrishnan noted that they are permitting adjustments in the exchange rate in an orderly manner.
“With regard to foreign investments in treasury bills, despite the recent reduction in interest rates in mid-March by 3%, the current average interest rates remain attractive to investors,” El-Beh said, “The CBE seeks to maintain this attractiveness, especially after the exit of about $15bn in foreign investments in debt instruments.”
He pointed out that despite the exit of these investments in debt instruments, the Egyptian government maintains the ability to control inflation. This comes after the government arranged to obtain $8bn from the IMF to counter the side-effects of the coronavirus pandemic
According to Al-Beh, although there is still room for the CBE to cut interest rates without affecting foreign investor sentiment and appetite towards the domestic debt market. He noted that expectations indicate that the CBE might be more cautious throughout the rest of 2020.
Economic recovery from shutdown
Radwa El-Swaify, Head of Research at Pharos Holding, expects the CBE’s interest rates to remain unchanged during the MPC’s Thursday meeting. She pointed out that the interest rate was reduced by 3% in March to support Egypt’s economy.
Because the economy is currently recovering in a gradual manner from the coronavirus-inspired shutdown, there is no need for further cuts.
El-Swaify stressed that there is no need to raise interest rates as well, as the state of the economy, Egypt’s productive sectors, and state budget cannot bear further financing burdens. She added that inflation is still less than the CBE’s targets, and has been under control for some time.
She explained that foreign investments in Egyptian treasury bills and bonds have begun to gradually improve as the coronavirus pandemic lessens its grip.
El-Swaify expects Egypt’s total inflation to record 4% and 4.5% in July and August respectively, and 5% and 5.5% during the period from September to November, and 6% to end the year.