Central Bank of Egypt Meeting: Interest Rate Expectations and Economic Outlook

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Investing.com – The Central Bank of Egypt’s Monetary Policy Committee will meet next Thursday to discuss deposit and lending issues, amid great interest in the economic community about the outcome of the meeting.

The expectations of financial institutions and economists varied regarding the possibility of adjusting the interest rate, but more importantly than the interest rate decision, is what the decision refers to, whether interest is raised or fixed, which we will address in this report.

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The Central Bank of Egypt kept the interest rate at 18.25% at the June meeting, after raising it last March by 200 basis points for the first time during the current year, and by 800 basis points last year, in an effort to absorb the wave of inflation, and in order to attract foreign investments in hard currency to debt instruments. government, after about $22 billion left the market following the Russian-Ukrainian crisis.

While the real interest rate (the nominal interest rate minus the inflation rate) is negative 17.45%, according to the latest data.

The Egyptian economist, Hani Genena, said that Egypt, which relies heavily on imports, is suffering from a rise in the prices of goods and services as a result of the increase in the price and depreciation of the pound, which jumped inflation rates to record levels, especially with the effects of the Russian-Ukrainian war, which entered its second year.

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In his interest rate forecast, Genena expects to raise interest by 200 basis points for several reasons, which we list below.

Firstly: Data from the Central Agency for Public Mobilization and Statistics and the Central Bank showed that the annual core inflation rate rose to its highest level in June (41%).

secondly: Despite the slowdown in the annual growth rate in the reserve money issued by the Central Bank, which is known as M0, compared to its rates in late 2022, the annual growth rate until last June was still at the level of 28.2%, which is a very high rate. There is no doubt that the Central Bank’s budget clearly shows that it continued to withdraw liquidity surpluses through deposit bids until the balance of deposited liquidity reached 942 billion pounds at the end of June, compared to 611 billion pounds at the end of December 2022.

Third: It is a factor related to the second factor, the Central Bank data at the end of May 2023 show a sharp acceleration in the growth rate of banknotes circulating outside the banking sector, reaching 25% compared to last year, which is a growth rate similar to exceptional growth rates that were recorded only during four historical political and economic crises in April 2011 (+27%), September 2013 (+30%), February 2017 (+26%) and July 2020 (+30%).

Fourthly: We add to these pressures mentioned above, external pressures represented in the rise in global energy and food prices once again as a result of the military operations in the port of Odessa in Ukraine, in addition to the rise in short-term and long-term interest rates in the United States of America by 25 basis points after the Federal Reserve meeting and after the announcement of the GDP data. , respectively.

Reasons to raise interest

Genena added that one of the most prominent factors that support the interest rate hike expectations is the anticipation of an increase in the administratively determined electricity and fuel prices, in addition to the possibility of a decrease in the exchange rate if the Egyptian government expresses its desire to complete the first review of the International Monetary Fund program a few weeks before the date of the second review, which is scheduled for next month. next September.

And he continued: Egypt, which is also facing difficulties in providing dollar flows, is still awaiting the first review of the fund program – which it signed in December for a $3 billion loan that allows it to secure dollar flows from partners – which was scheduled for mid-March and has not yet taken place.

He explained: Despite expectations of raising interest rates, the sensitivity of the current economic situation may prompt the Central Bank to postpone the tightening decision until the September 21st meeting. He stressed that the August 3 decision comes at a very sensitive time politically and socially, given the difficulties faced by the private sector, such as frequent power outages and lack of hard currency.

Genena added: The sharp tightening decision – if it is taken in parallel with adjusting electricity and fuel prices – will indicate the imminent end of the first review of the Monetary Fund program, perhaps merging it with the second review and disbursing the equivalent of approximately $700 million from the International Monetary Fund.

But if the interest rate is kept as it is, the possibility of continuing the fund program during this year will become very weak, and negotiations may be repeated next year.

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2023-07-31 12:19:00
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