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10 reasons why the central bank has instead resorted to increasing the required reserve

14:10

Friday 23 September 2022

I wrote – Manal Al-Masry:

An official of the Central Bank of Egypt revealed the reasons for the Central Bank of Egypt’s use of raising the mandatory monetary limit for banks and setting the interest rate instead of raising the interest rate.

The Central Bank of Egypt has decided to increase the compulsory cash reserve ratio of bank deposits to 18% instead of 14%, which accompanied its decision to set interest rates for the third consecutive time during the meeting of the Committee of monetary policy yesterday, Thursday, at 11.25% for the deposit and 12.25% for the loan.

This required reserve increase is the first of its kind since October 10, 2017, when the Central Bank increased it from 10% to 14% as of October 10.

The Central Bank reduced the required reserve requirement by 4% in 2012, to allow banks to meet the increased demand for liquidity after the January 25 revolution.

Mandatory reserve is a percentage of total customer deposits with banks, both in local and foreign currency, that the Central Bank obliges banks to deposit without receiving a deposit refund.

The increase in reserve requirements is not only related to inflation, but its main objective is that the banking sector is in good shape, which means that there is no excess liquidity that banks will pay to lend without good credit verification. borrower and his ability to repay.

In the following lines, Masrawy presents 10 main reasons for the decision, according to an Egyptian Central Bank official:

1- At the moment it will not be possible to raise the interest rate to curb inflation, as central banks around the world realize that rising prices for goods and services are the result of supply and non-supply-side shocks. he asks, so the central bank has shown interest.

2- The central bank believes that the impact of its previous decisions to raise interest rates overall by 3% (1% in March and 2% in May) is still being transmitted to the markets, so it is difficult to make a decision in a new one. excursion.

3- The increase in the required reserve prevents the central bank from resorting to raising interest rates and therefore from supporting the economy, especially with the negative impact of global economic conditions on the business community.

4- Save the public treasury from incurring an additional cost of internal debt in order to close the funding gap and thus not expand the budget deficit.

5- The size of the untapped surplus liquidity in the banks is 600 billion pounds, which makes it necessary for the Central Bank to move to use a tool to control the liquidity rate, which is the required reserve.

6- The decision will help absorb liquidity from the banks of between 140 and 150 billion pounds.

7- The value of deposits increased by one trillion pounds in the period (January-August 2022) to register the total deposits of the banking sector at 6.5 trillion pounds at the end of last August, which has helped increase liquidity – which is mainly high – in banks.

8- The result of the increase in the compulsory reserve ratio appears rapidly and directly to tighten monetary conditions and is not reflected in the cost of financing and economic activity.

9- The stabilization of interests helps to support the activities of companies and motivate them to expand investment and employment, while the increase in interest rates does not allow it.

10- The increase in the compulsory reserve is used periodically, which contributes to the achievement of the Central Bank’s objectives of reducing inflation rates.

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