CAIRO - 18 August 2022: The Monetary Policy Committee (MPC) decided, Thursday to keep the Central Bank of Egypt’s (CBE) interest rates unchanged despite the expectations that went towards raising the rates by 50 or 100 basis points.
The overnight deposit rate, overnight lending rate, and the rate of the main operation were kept on hold at 11.25 percent, 12.25 percent, and 11.75 percent, respectively. The discount rate was also kept unchanged at 11.75 percent.
According to the MPC, this decision was supported by the growth of the domestic economic activity by a preliminary figure of 6.2 percent in fiscal year 2021/22, compared to 3.3 percent in the previous fiscal year. “This reflects stronger than previously expected growth,” it pointed out.
According to the announced data in the MPC’s statement, the latest available data for the first nine months of the fiscal year shows that GDP growth was mainly driven by the private sector, particularly non-petroleum manufacturing, tourism, and trade. Meanwhile, public sector activity was supported by natural gas extractions, Suez Canal and the general government.
“Moreover, most leading indicators remained in positive territory in 2022 Q2,” it added.
The committee also kept in mind the stabilization of the unemployment rate at 7.2 percent in 2022 Q2, commenting that the stability comes in light of both employment and the labor force figures increasing by similar magnitudes, offsetting one another.
As for the inflation rate, the MPC attributed the hike of the rates to the seasonal impact of Eid Al-Adha, the repercussions of the Russo-Ukrainian conflict, as well as, the indirect effects of higher prices of fuel products.
The annual headline urban inflation resumed its upward trend in July 2022, that started in December 2021, to record 13.6 percent, that is after decelerating in June 2022 to record 13.2 percent, the MPC stated, adding that July’s annual core inflation - which excludes volatile food and regulated items - recorded 15.6 percent in July 2022 from 14.6 percent during the previous month.
“The elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s pre-announced target of 7 percent (±2 percentage points) on average in 2022 Q4, before declining thereafter,” the MPC said.
In the same vein, Al Ahly Pharos Securities Brokerage stated that the unchanged interest rates were expected due to the CBE’s earlier decision in the June 23 meeting when it kept the rates unchanged showing reluctance to rush into rate hikes which would hurt the macro-fiscal front.
It added in a research paper that oil prices began to ease partially in response to demand concerns, as well as global food prices, as captured by the FAO food index, which dropped by 8.6 percent MoM in July, partly reacting to the agreement reached between Ukraine and the Russian Federation to unblock Ukraine’s main Black Sea ports, among other factors. “This indicates that, if this trend continues, the global pressure on domestic prices could be mitigated in the upcoming period,” it added.
“Any rate hikes would place an additional upward pressure on the already ballooning interest payments in the state budget, and would squeeze the capital market, hindering the implementation of the government IPO program and the state ownership policy document,” it added in the paper.
Furthermore, Al-Ahly Pharos added that there is a minute chance that foreign investors’ sentiment towards emerging and frontier markets would shift at this stage, noting that rushing into rate hikes means risking the aforementioned macro-fiscal pillars with little gains.
For his part, Economic Expert, Ashraf Ghorab, attributed the decision to maintaining growth rates and achieving targets on the one hand, in addition to reducing the increase in the cost of financing for companies, “in addition to the stability of inflation rates during the last month, where the increase was a small, negligible percentage.”
Ghorab noted that returns on treasury bills rose to 16 percent, in addition to the fact that in light of the decline in foreign investments in debt instruments, there was no reason to raise interest rates at the present time, and therefore the central bank resorted to fixing the interest rate and the matter will be resolved at its next meeting.
He explained that the decline in oil prices and the stability of its price globally, and the decline in the prices of food commodities globally and in Egypt, especially wheat, rice, vegetables and grains, is a good indicator to reduce the inflation rate in the coming period, and here there is no need to increase the interest rate.
The economic expert affirmed that keeping the interest rates unchanged encourages investment and increases it besides increasing production, which in turn helps in increasing the supply in the markets. Consequently, this contributes to reducing commodity prices because the increase in supply reduces prices or makes them stable.
“Increasing production, especially in light of the state's tendency to maximize the national industry and increase the volume of exports to reach $100 billion, raises the value of the pound against the dollar, and this contributes to attracting foreign investors,” he elaborated.
Ghorab continued, that the decline in oil and grain prices helps reduce pressure on the Egyptian balance of payments, and that the Central Bank has raised interest rates twice during the months of March and May 2022, which is a proactive step following the Russian-Ukrainian crisis.
He pointed out that if the Central Bank had raised the interest rate this time, the value of the pound would have decreased against the dollar again, in addition to the fact that raising its price would raise the interest rate on the debt.