Reasons behind Egypt's central bank keeping interest rate unchanged

CAIRO - 22 September 2022: The Monetary Policy Committee (MPC) decided, Thursday, to keep the Central  Bank of Egypt’s (CBE) interest rates unchanged for the third consecutive meeting despite the global trend to raise the rates. 

 

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.

 

Furthermore, the CBE decided to increase the required reserve ratio to 18 percent from 14 percent. 

 

The Central Bank commented that these decisions act as a complementary catalyst for the tight stance that the Central Bank maintains through calibrating liquidity positions.

 

The MPC saw that the current key CBE rates coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term, noting that the prior 300 basis point hike the central bank took earlier still has an impact on the economy. 

 

Inflation factor and its impact on the decision

 

The central bank stated that the elevated annual headline inflation rate will continue to be temporarily tolerated above the CBE’s pre-announced target of 7 percent (±2 percentage points) on average in the fourth quarter of 2022. 

 

The bank attributed the increase of the annual urban inflation rates which rose from 13.6 percent in July to 14.6 percent in August to supply side issues particularly international commodity prices. “Despite rising annual figures, the recorded monthly rates are lower than the recent highs witnessed during March and April 2022,” it commented.

 

For its part, Al Ahly Pharos Securities Brokerage stated that the inflation as a sole factor did not urge the CBE to raise the interest rates, agreeing that the hike in inflation rate is imported, anticipating that global conditions, including commodity prices' recent behavior as well as global growth concerns, indicate lower imported inflationary pressures in the near-term.

 

“The receding monthly inflation, although not yet a trend, might look sanguine to our near-term inflation outlook,” Al Ahly Pharos said in a report.

 

The report said that the food price index also dropped by 1.996 in August on a monthly basis, registering its fifth consecutive monthly decline, noting that this is also supportive of our inflation outlook. 

 

The Central Agency for Public Mobilization and Statistics (CAPMAS), announced earlier, that Egypt’s annual inflation rate rose to 15.3 percent in August 2022, compared to 6.4 percent in the same month of prior year. In July, the annual inflation rate recorded 14.6 percent.

 

The annual urban inflation rate also hiked in August to 14.6 percent, compared to 13.6 percent in July, according to the state-statistic body’s data.

 

On a monthly basis, inflation recorded 131.7 points in August 2022, recording a 0.5 percent increase compared to July 2022, the CAPMAS said.

 

Other factors

 

Other factors that have an effect on the movement of the rates are the magnitude and time frame for a potential Egyptian pound weakening and the progress on the IMF deal, according to Al Ahly Pharos. 

 

The Egyptian pound has witnessed an accelerating decline in recent weeks, amid expectations of experts that the Central Bank will continue to gradually reduce the currency until it reaches levels ranging between LE 21-22 per dollar. This is in order to ensure the flexibility of the exchange rate required by the International Monetary Fund, with which Egypt is seeking to sign an imminent agreement with which to obtain a new loan.

 

Previously, Jihad Azour, director of the Middle East and Central Asia Department at the International Monetary Fund, said that negotiations to obtain new funding are continuing with Egypt and things are progressing according to the set schedule.

 

Prime Minister Mostafa Madbouli said earlier that the Egyptian government is in the final stage of talks with the International Monetary Fund on a new funding.

 

In July, Maait said Egypt is working out the remaining points of difference with the IMF over a new extended fund facility.

 

Maait affirmed to Al-Arabiya that the talks with the IMF are ongoing and that they have achieved “very, very good progress”, noting that the value of the loan has not yet been set.

 

 

The impact on the state budget

 

One more factor behind keeping the rates unchanged is their impact on the state budget, Al Ahly Pharos said that with an estimated LE 690 billion of interest payments in the fiscal year of 2022/23 budget, any additional hike in rates squeezing to the fiscal balances. 

 

“Besides, it is worth mentioning that the simple average yield on government treasuries during the first two months of the fiscal year hovers around 15.52 percent, already far from the government's assumption of 14.5 percent for the year,” it stated.

 

According to Al Ahly Pharos, a rate hike would bring back foreign investors to the Egyptian local debt market within a few months. However, the risk aversion towards the Emerging markets is still in place. 

 

“Although real interest rates are negative [which stands at -3.35 percent], we believe real yields on Egypt's treasuries still look attractive. Rather, foreign investors might be keeping an eye on FX risk, more than awaiting higher interest rates, it added.

 

Egypt’s economic activity

 

Moreover, the CBE stated that the economic activity registered a preliminary growth of 3.2 percent during the second quarter of 2022. Thus, Egypt’s economic growth during the fiscal year 2021/2022 hit 6.6 percent, up from 3.3 percent in prior year.

 

According to the CBE, 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.

 

Despite the indicators revealing continued growth during the third quarter of 2022, the growth pace would witness a slower rate than the targeted one, due to the uncertainty and negative spillovers from the global scene.

 

The CBE pointed to the stability of the unemployment rate at 7.2 percent during the second quarter of 2022 as a result of the increase of both employment and the labor force figures by similar magnitudes.

 

Interest rates hike among major central banks 

 

It referred to the rise of interest rates among major central banks in the world which would cause a tight in the global financial conditions, besides their tendency to reduce asset purchase programs with the aim of containing increased inflationary pressures in their respective countries, noting that the global economic activity is expected to lower due to the repercussions of the Ukrainian-Russian conflict.

 

“In contrast, global commodity prices, such as international prices of oil, have slightly declined, as a result of weakening demand due to global recession expectations,” it stated.

 

In the same vein, Al Ahly Pharos said that average Brent prices dropped to $97 per barrel in August, down from $105 per barrel in July, recording a decline of 7.4 percent on a monthly basis, alleviating some of the pressure on domestic prices. 

 

The central banks of some Gulf countries tended to raise interest rates following the increase in the United States interest rates by 75 basis points on Sept. 21.