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Uncertainty clouds future of interest rate on Egyptian pound - Daily News Egypt

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Uncertainty clouds future of interest rate on Egyptian pound

The Monetary Policy Committee will hold its last meeting in 2016 on Thursday to review the prices of basic earnings at the CBE


A state of uncertainty controls the Egyptian banking market over the future of interest rates on the Egyptian pound after inflation had witnessed successive increases nearing 20%. There are also fears that the increase of interest rates would boost the local public debt, as well as the state budget deficit.

The Monetary Policy Committee affiliated with the Central Bank of Egypt (CBE) will hold its regular sixth meeting of the year on Thursday to discuss the future of basic yield in the CBE, which is the leading indicator for the direction of interest rates on the Egyptian pound in the local market.

The CBE had increased the prices of basic yields three times during the year, as it was increased by 1.5% on 17 March, by 1% on 16 June, and by 3% on 3 November, along with the CBE’s decision to float the pound.

According to the Monetary Policy Committee, those three moves came to contain inflation and control commodity prices, especially after the devaluation of the pound by EGP 1.12 on 14 March and the full flotation on 3 November.

At the beginning of 2016, the deposit rate reached 9.25%, the lending rate reached 10.25%, and the price of credit and debit reached 9.75%. On 3 November, the deposit and lending rate, and the price of credit and debit reached 14.75%, 15.75%, and 15.25%, respectively.

The CBE announced on 10 December that the inflation rate registered 20.73% in November, compared to 15.72% in October, with an increase of 5.01%.

This is the highest annual inflation rate since December 2008, when it scored 19.376%, according to the CBE.

The monthly inflation rate registered 5.33% at the end of November, compared to 2.81% in October, with an increase of 2.52%.

According to the CBE, the Consumer Price Index (CPI) reported by the Central Agency for Public Mobilization and Statistics (CAPMAS) registered an annual increase of 19.43% in November, compared to 13.56% in October, with an increase of 5.87%.

The monthly inflation rate recorded 4.85% in November, compared to 1.70% in October, with an increase of 3.15%.

According to Osama El-Menilawy, assistant general manager of the financial sector at a private bank operating in Egypt, the CBE faces a very difficult situation with regard to determining the interest rates on the local currency.

He said that the CBE is expected to increase the interest rates on the pound to control the prices hikes of commodities and contain inflation and its negative effects on citizens. However, the CBE cannot take such a move to avoid affecting the debit yield rates, of which the government covers the budget deficit.

In light of the strong expectations of another inflationary wave in the coming period after the successive price increases, the CBE should increase the interest rate on the Egyptian pound by at least 2%, without adding more pressure on the public budget, according to El-Menilawy.

He predicted that the Monetary Policy Committee would maintain the prices of basic earnings at the CBE during its meeting next Thursday.

In contrast, Tamer Youssef, head of the treasury sector in one of the foreign banks operating in the domestic market, expected that the Monetary Policy Committee would increase the prices of basic earnings by 1% during its next meeting.

He believes that the committee is obligated to do so because of the high inflation rate and to encourage US dollar holders to sell to banks. This awaited decision comes also to keep the big difference between the interest rates on the pound and the dollar, as the Federal Reserve System (FRB)—the central banking system of the United States—is expected to increase the interest rate on the US dollar.

A few days ago, the Monetary Policy Committee at the FRB increased interest rates on the dollar by 0.25%, recording 0.5-0.75% for the first time this year, during its last meeting.

Youssef pointed out that the increase of basic earnings at the CBE will not affect long-term savings instruments such as certificates, but it will only affect deposits and short-term savings.

The recent increase of 3% on the prices of basic earnings on 3 November has led to a large wave of high interest rates on savings certificates, while public banks issued new instruments with high interest rates, amounting to 20%, which increased deposits in local currency.

According to the deputy governor of the CBE, Gamal Negm, the new saving certificates with an interest rate of 16% and 20% have collected new liquidity from outside the banking system estimated at EGP 64bn.

Analysts expressed their concerns of repeating the same scenario if the CBE decided to increase the interest rate on the pound again; thus, the banks will suffer more as they could not invest their liquidity in the local currency since January 2011. However, Youssef ruled out the repetition of this scenario.

Youssef said that the government may work on increasing the interest rates on the bonds and treasury bills it issued to bridge the budget deficit for three or six months at most, and then the interest rates will drop again.

The government will sacrifice a little to achieve a larger goal of controlling the foreign exchange market and attracting foreign investors to purchase government debt instruments with high interest rates. However, this sacrifice will not last long, according to Youssef.

He added that the increase of interest rates on the local currency aims to contain the inflation in Egypt, which resulted from the flotation of the pound, as well as the high fuel and commodity prices which are temporary and will end soon.

According to Youssef, it is expected that the government will begin the implementation of an “expansionary” policy aimed at increasing domestic and foreign investment, and boosting the growth rate. This policy requires that the CBE decreases the interest rates on the pound.

 

https://ww.dailynewssegypt.com/2016/12/25/606435/
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