The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) is expected to keep interest rates on hold during its seventh periodic meeting this year, on Thursday.
The MPC periodic meeting comes amid strong market expectations that it will keep Egypt’s interest rates unchanged for the eighth time in a row, despite the rise in the inflation rate in the recent period, and there are expectations of a further rise in the coming period.
The MPC decided to maintain interest rates, for the seventh consecutive time, at its meeting on 16 September. Overnight deposit and lending rates remain unchanged at 8.25% and 9.25% respectively, while main operation and discount rates remain at 8.75%. These are the levels reached in November 2019.
At the time the committee said that the basic interest rates at the Central Bank of Egypt are appropriate at present, and are consistent with achieving the target inflation rate of 7% (± 2 percentage points) on average during the fourth quarter of 2022 and price stability in the medium term.
Recently, the CBE announced that the monthly core inflation recorded 0.4% in September 2021, compared to a negative monthly rate of 0.3% in August, while the annual rate of core inflation recorded 4.8% in September, compared to 4.5 % in August.
Meanwhile, the Egyptian Central Agency for Public Mobilization and Statistics (CAPMAS) revealed that the annual consumer price inflation in Egyptian cities rose to 6.6% in September, compared to 5.7% in August.
The agency said that the headline inflation amounted to 116.1 points in September, recording an increase of 1.6% up from August. CAPMAS indicated that the annual headline inflation rate recorded 8% in September, compared to 6.4% in August.
Mohamed Abdel Aal, a banking expert, said that MPC is expected to continue to keep interest rates unchanged, as the current interest rate levels continue to be consistent and balanced with most of the major domestic and global economic indicators.
Abdel Aal explained that the rise in the inflation rate in September with its headline and core indicators was expected due to the increase in demand for commodities with the global economic recovery on the one hand, and the rise in oil prices on the other hand.
He added that despite the upward trend of the inflation rate, it is still within the CBE’s target, thus, the MPC would not do any interest rate adjustments at the current stage.
Abdel Aal indicated that the existence of a very reasonable real return difference between the current level of interest rates and inflation in the pound and the level of inflation would have allowed the monetary authority to reduce interest. However, the MPC may prefer to continue at current levels to support the savings of the family sector, allowing for good returns on their savings, in a way that guarantees them a stable income. This aims to create a derivative demand for goods and services, as well as to attract remittances from Egyptians abroad, and to preserve the flow of foreign indirect investment in government debt securities.
He added that the concern of some observers about the US Federal Reserve easing its monthly purchases of bonds in November and the start of raising interest rates at the beginning of next year, although realistic, maybe relatively exaggerated.
“Because the diversity of foreign exchange sources, the stability of the pound price and foreign exchange reserves, by achieving a real competitive return, all of which reduces and mitigates the impact of these concerns in the short and medium-term.”
Moreover, Egypt is turning to sources of long-term loans as an alternative to hot money, and also the entry of government bonds to the Euroclear platform will help attract new long-term investments, Abdel Aal explained.
Accordingly, this will compensate for the exit of short-term foreign investments in local debt securities, if they exit with the impact of the potential and expected rise in US interest.
Abdel Aal stressed that the timing is not suitable for any changes to interest rates, as the CBE aims to follow a balanced monetary policy. He pointed out that raising interest rates, while we are still in the fourth wave of Covid-19, may lead to a reduction in economic recovery and growth. On the other hand, slashing interest rates may lead to a contraction in the aggregate demand for goods and services, as a result of a decrease in the purchasing power of savers from the family sector, and may negatively affect the volume and value of the foreign indirect investment.
Similarly, Tarek Metwally, a banking expert, expected the MPC to keep Egypt’s interest rates on hold during its meeting on Thursday.
Metwally explained that despite the rise in inflation to the level of 8%, it is still in line with the Central Bank of Egypt’s targets for this year, which range between 5- 9%, which are the targets that maintained the continuity of business activity and achieved positive growth rates.
He added that the inflationary wave came as a result of global conditions that cast a shadow on the Egyptian economy, and not as a result of internal factors related to supply and demand in the local market.
He added: “The real interest is still in favour of the Egyptian pound in the range of 2-3% currently, which is an acceptable and attractive rate in emerging markets, which gives the monetary policymaker an opportunity to keep the current interest rates unchanged.”
For its part, Beltone Investment Bank also believes that the Central Bank of Egypt will keep interest rates unchanged.
The investment bank attributed these expectations to the central bank’s need to maintain the attractiveness of investment in the fixed income market, especially with the rise in interest rates globally, which puts pressure on flows to emerging markets.
It is expected that the annual inflation will continue to rise in the fourth quarter of 2021, with the start of the rise in global prices of commodities gradually being reflected on the local market, in addition to the impact of the comparison periods.
The Research Department at HC Securities and Investment expected the Central Bank of Egypt to keep the interest rate unchanged at its meeting scheduled for Thursday.
Monette Doss, a Senior Analyst for the company’s macroeconomic and financial services sector, said that the inflation rate in Egypt is expected to remain within the central bank’s target range of 7% (+/- 2%) for the fourth quarter of 2022, and is expected to average 5.9% in the fourth quarter of 2021.