The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its seventh periodic meeting on Thursday 15 November 2018, to discuss the future of its basic interest rates, which is the main indicator of interest rates on the Egyptian pound.
Since the beginning of this year, the MPC held six meetings, during which the committee cut interest rates in the first two meetings on 15 February and 29 March by 1% in each meeting.
During the following four meetings held by the MPC on 17 May, 28 June, 16 August, and 27 September, the interest rates remained unchanged at 16.75% for deposits, 17.75% for loans and 17.25 for main operations, credits, and discounts.
In the MPC’s statement during the last meeting on 27 September 2018, it declared that “annual headline inflation rose to 14.2% in August 2018 from 11.4% in May 2018, while annual core inflation continued to decline for the 12th consecutive month to record 8.5% in July 2018, before increasing slightly to 8.8% in August 2018. As anticipated, upward adjustments of regulated prices as well as higher prices of fresh fruits and vegetables contributed to the widening spread between headline and core inflation since June 2018.”
Furthermore, the statement added, “annual real GDP growth stabilised in 2018 the second quarter (Q2) at the 5.4% rate registered in the previous quarter, which was mainly driven by net foreign demand, as well as by domestic investment. Meanwhile, job creation supported the decline of the unemployment rate to 9.9% in Q2 of 2018, the lowest rate since Q4 of 2010.”
The pass-through to domestic inflation from developments in emerging market (EM) economies remained contained due to stabilisation and structural policies which support improving macroeconomic fundamentals.
The MPC decided that keeping key policy rates unchanged remains consistent with achieving the target path for headline inflation which was announced in May 2017, namely 13% (±3 %) in Q4 of 2018, and single digits after the temporary effect of fiscal supply shocks dissipate.
“The MPC closely monitors all economic developments, and will not hesitate to adjust its stance to achieve its mandate of price stability over the medium term,” it concluded. On Saturday 10 November, the Central Agency for Public Mobilisation and Statistics announced an annual inflation rate of 17.5 % in October 2018, compared to 15.4 % in September 2018.
The monthly inflation rate rose to 2.8 % in October from 2.6 % in September.
According to Mohamed Abdel Aal, a well-known banking expert, it is not necessary for every meeting of the CBE’s MPC to be accompanied by a new change in existing interest rates.
He pointed out that the CBE is the one with the tools, techniques, information and data, and most importantly the specialised expertise which has the vision and the analytical ability, to take such an important decision which is directly linked to the core of monetary policy, in order to ensure the success of the implementation of the economic reform programme so far.
“Although the MPC kept interest rates unchanged at four consecutive meetings, I think that the factors impacting the decision to raise, and fix interest rates may be conflicting,” Abdel Aal indicted.
There are factors that indicate the necessity of increasing the rates, while other factors push against that, to keep rates unchanged or even cut them, explained the banking expert, adding “All options are on the table.”
The next decision of the MPC will be one of two scenarios, the first is to raise interest rates by a full percentage point, according to Abdel Aal. He remarked that the CBE may resort to this scenario in order to evade some underlying and potential inflationary pressures, and to preserve the attractiveness of the Egyptian pound, in terms of the exchange rate and return prices to encourage foreign investors and expatriate remittances, as well as to protect the interests of depositors from the household sector, in addition to the competition faced from other countries that increase interest rates due to economic instability.
However, Abdel Aal believes that this scenario faces many resistance points to be considered, noting that the most important of these is the high cost of local government loans, thus increasing the debt burden.
He expressed that the local public debt is estimated at EGP 3.6tn, with interest of EGP 510bn, which means that any 1% increase in interest rates adds EGP 30-35bn to the debt. This means that the decision to raise the interest rate may contradict the Ministry of Finance’s strategic objective of reducing the deficit rate in the state budget.
According to Abdel Aal, the second thing that could prevent the CBE from raising interest rates. which is the high financing costs of various economic activities, which might hinder the success of targeted economic growth rates.
He pointed out that a third thing which may face an interest rate surge is the inflation. “Although the annual inflation rate in September 2018 fell to 16% from 14.2% in August, the annual rate of core inflation recorded 8.6% in September against 8.8% in August, suggesting that inflation figures may be moving in a downward trend until the end of the year.”
He added that this may mean that the current inflation rate, under the present level of interest rates, is already in a balanced course, with the achievement of the monetary policy objective of reaching an inflation rate of 13% (+/-) 3% at the end of this year.
However, Abdel Aal nothed that, on the other hand, there is still a difference between the interest rates at the CBE at 3%, which gives the CBE the chance to fix the rates for now.
As stated by the well-known banking expert, the second scenario before the MPC at its next meeting is to stabilise the interest rates, which is more likely in this current phase.
He explained that stabilising interest rates, with the relative balance of other domestic economic indicators, achieves a reasonable constancy point, which in turn brings the greatest value-added to all parties, while ignoring the factor of rising interest rates in some developing countries competing with us, given that these countries are fraught with political and economic risks, thus making their high interest rates less attractive.
“It can be said that according to the development of local and global events, the raising of interest rates is theoretically preferable, but on the other hand, there are things to take into account and can be weigh in favour of keeping rates unchanged to the end of this year,” he concluded.
Tarek Metwally, a banking expert, expected the MPC to keep rates unchanged on Thursday.
He explained that the current inflation rates, which are in line with the objectives of the CBE, favours this prospect.
The CBE is ardent to maintain foreign exchange inflows towards Egypt, and thus maintain its foreign exchange reserves, considering the recent strikes which hit EMs and led to countless investments shifting away to more developed countries, Metwally disclosed.
“The expected increases in oil prices globally and their impact on budget deficits, and the prospects of raising the price of gasoline and petroleum derivatives locally again, and the impact on inflation in the next period, are all factors driving in the direction of stabilisation of interest rates,” he concluded.
