Interest rates

Current interest rates depend on expected inflation rates, not prevailing rates: Egypt

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided at its meeting on Thursday to maintain its base interest rates at 11.25% for deposits, 12.25% for loans and 11.75% for the credit and discount rate and the price of the main operation of CBE.

In its accompanying resolution, the Committee said: “Globally, global economic activity has slowed due to the continuing Russian-Ukrainian crisis. Trade sanctions imposed on Russia and the resulting bottlenecks in supply and supply chains have led to higher global commodity prices, as well as prices, as central banks l Foreigners have continued to tighten monetary policies by raising interest rates and reducing program asset purchases, to contain high inflation rates in their countries. Additionally, the recently imposed shutdown in China has raised concerns about the potential to exacerbate disruptions to global supply chains.

“Early data indicates that domestic economic activity continued to recover during the first quarter of 2022, albeit at a slower pace, with real GDP growing at 5.4% from 8.3 % during the fourth quarter of 2021. This slowdown is due to several factors, including the repercussions of the Russian-Ukrainian crisis, in addition to the disappearance of the positive impact of the base period, which has lasted for the last nine months,” the MPC said.

The committee expects economic activity to experience slower than expected growth rates, partly due to the negative impact of the Russian-Ukrainian crisis.

Regarding the labor market, the committee indicated a drop in the unemployment rate in the first quarter of 2022, recording 7.2%, attributing this drop to the increase in employment rates, which in turn limited the increase in the working population.

The committee pointed out that the annual general urban inflation rate continued to increase, but at a slower pace, to register 13.5% in May 2022 against 13.1% the previous month. She pointed out that the annual rate of underlying inflation, which does not include fresh fruits and vegetables, goods and services whose prices are fixed administratively, saw an increase at a slower pace for the second month. consecutive, and continued its upward trend to record 13.3% in May 2022 against 11.9% the previous month.

The committee attributed the rise in the annual general inflation rate to higher non-food commodity prices, with annual food commodity inflation slowing for the first time since the start of the year, supported by the easing of the supply shock experienced in previous months in certain fresh vegetables.

He added that the evolution of inflation in May 2022 continued to be affected by the evolution of the exchange rate of the Egyptian pound, as well as by the repercussions of the Russian-Ukrainian crisis on commodity prices.

The MPC considers the global developments resulting from the Russian and Ukrainian crises to be primary supply shocks that are outside the scope of monetary policy action, although these shocks may lead to inflation targets being exceeded previously announced.

She pointed out that monetary policy tools are used to control inflation expectations, reduce inflationary pressures from the demand side and the side effects of supply shocks, which can lead to relatively higher rates of inflation. than the target inflation rates.

“Given the current initial supply shocks, inflation rates could deviate relatively from the central bank’s target inflation rate of 7% (±2%) on average during the fourth quarter of 2022, provided that it gradually decreases thereafter,” he said.

The Committee confirmed that it would continue to assess the impact of its decisions on inflation expectations and medium-term macroeconomic developments, taking into account the decisions taken at the two previous meetings to raise interest rates by base. He noted that achieving low and stable inflation rates in the medium term is a prerequisite for supporting the purchasing power of the Egyptian citizen and achieving high and sustainable growth rates.

The Committee also stresses that current interest rates depend mainly on expected inflation rates and not prevailing rates, and that the Committee will closely monitor all economic developments and will not hesitate to adjust its policy to achieve the medium-term price stability objective. term.

It should be noted that the MPC’s decision to fix the interest rate was widely expected, after the two consecutive rate hikes in March by 1% and in May by 2%.

Pundits and bankers pointed out that the CBE did not have to change the interest rate this time around because it took proactive measures to deal with inflation, succeeded in doing so and that she got positive results.

Tamer Youssef, head of the treasury sector at one of the foreign banks operating in the Egyptian market, said that MPC’s decision to fix the interest rate reaffirms the stability of economic conditions and the Egyptian pound’s preservation of its competitive position in relation to foreign currencies, especially since the interest differential between it and foreign currencies always works in its favour.

He explained that the decision to fix the interest was awaited. “What we are witnessing in terms of rising prices is the direct result of external reasons, so the successive increase in the interest rate will not have the effect of containing inflation rates, and the reduction of money supply in the market by raising interest rates could have negative effects on growth rates given the slowdown in the global economy.

Sahar El-Damaty, a banking expert, also confirmed that the CBE was not forced to raise the interest rate again as it had taken proactive measures earlier. She noted that the Gulf central banks tended to raise the interest rate after the change in the United States, due to the fact that the Gulf currencies were linked to the dollar, while the Egyptian pound was linked to several currencies. .

She explained that the US Federal Reserve had raised the interest rate by 1.5% in the last period, while the CBE had taken strong proactive measures by raising the interest rate by 3%.

She added that the difference between the interest on the Egyptian pound and the US dollar is very large, and therefore encourages investment in the Egyptian pound, which gives a kind of reassurance in the coming period.

She pointed out that Egyptian banks offered high yields on savings certificates, pointing out that the increase in interest leads to economic slowdown, increased costs for industry and higher food prices, and that a 1% increase in interest increases the budget deficit by about EGP 30 billion.

She explained that the majority of the speculative money represented in foreign investments in treasury bonds has already gone out and therefore there is no need to raise interest, explaining that despite the urban inflation rate of 13, 5%, there are certificates with a yield of 14% and 15% on the market, which excludes an increase in interest. El-Damaty pointed out that these certificates are considered a safe way to attract savings from individuals and protect them from inflation.

She pointed out that the return of dollarization is totally excluded with the high interest rate on the Egyptian pound and local currency cash vouchers. She noted that MPC considers internal and external conditions and variables before making its decision on interest rates.

The decision to fix the interest rate by the CBE is also in line with expectations from HC Securities and Investment, which expected the CBE to keep the interest rate unchanged at its meeting on Thursday.

“We believe further rate hikes will not prove effective in fighting inflation and could backfire by dampening production, leading to further supply shortages,” said Monette Doss, senior services analyst. macroeconomics and financials at HC Securities.

She added: “Inflation is below our expectations at 14% on an annual basis and we expect inflation to average 14.4% over the rest of the year, which is above the CBE target. at 7% +/- 2% for the fourth quarter of 2022. It is affected, to a large extent, by the external situation reflecting certain product shortages due to the lack of local manufacturing and weak imports”.

She added that Egypt’s Purchasing Managers Index was 47.0 in May as data points to falling consumer spending, new supply order volumes falling at the fastest rate since 2020. and a decline in demand for production inputs as well as the rate of employment and employment.

Beltone Financial also expected interest rates to be set at the meeting.

The company’s research department said in a research note that it believes the full impact of rising interest rates on inflation will take time to be fully reflected, expecting that CBE keep interest rates unchanged at Thursday’s meeting, to control inflation rates, with the state of instability the world is currently witnessing.

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