Raising interest rates bears negative impacts: bankers

CBE raised interest rates by 3% in November 2016, but inflation climbed to above 30%, says Aboul Fotouh

Banking experts and economists stressed that the decision taken by the Central Bank of Egypt (CBE) to raise interest rates by 200 basis points on Sunday will not help curbing the high inflation, but would rather come with greater negative impacts across all economic sectors.

Hany Aboul Fotouh said that the CBE contradicted all market expectations that expected the CBE would keep the interest rates unchanged, as monthly inflation and unemployment rates were declining, along with the improving economic growth rates in the third quarter of the current fiscal year.

He added that the decision was in line with the International Monetary Fund’s (IMF) directives to the CBE that stressed the need to use its tools to curb inflation, which has become the highest among emerging markets, through raising interest rates.

Aboul Fotouh noted that raising interest rates alone will not be enough to control inflation, as the current inflation problem in Egypt is not linked to liquidity surplus amid a decline of consumption.He explained that when the CBE raised interest rates by 3% in November 2016, inflation kept climbing to more than 30%.

“The decision will have negative direct and indirect repercussions borne by multiple economic sectors and ultimately will be affecting the citizens,” he added.

Moreover, he explained that these repercussions include an increase in local debt, as the cost of borrowing from banks through government debt instruments to bridge the state budget deficit, will rise.

He also expected the cost of private investments to increase, which would force investors to put their funds in saving vessels instead of channeling them to investments.

In addition, he said that the decision will also cast a shadow on trading on the Egyptian Exchange (EGX) as investors may prefer to invest in banking saving vessels with higher interest rates and lower risks. This would also cause a slowdown in the real estate market amid the rising cost of constructions.

According to Ezz El-Din Hassanein, an economist, the decision of the CBE may be driven by expectations for further price increases in the coming months, which will have a new inflationary impact. “This could be a preemptive strike by the CBE to curb the expected inflation,” he added.

Yet, Hassanein said that raising the interest rates is not suitable in the current period, as the current and expected inflation is not caused by a surplus in cash, but by the flotation and the price hikes of energy, along with the implementation of the valueadded tax.

He noted that if the IMF and the CBE agreed to raise the interest rates to curb the current, likely to increase, inflation; it remains a purely theoretical application and does not respond to the real life in Egypt that is witnessing less liquidity.

He pointed out that the high interest rate will benefit deposits, especially from the household sector, and will also be positive to protect local savings from erosion led by inflation. “However, it will have a negative impact on investments and borrowing from banks,” he said.

Hassanein added that investors will be negatively affected by raising interest rates on current standing debts, which would raise the cost of borrowing and increase production costs, which will force producers to raise prices of local products, becoming infectious to all products and services. Worse, new loans will almost stop, according to him.

He noted that the government will be harmed by the increasing size of local debt when the return on debt instruments hikes, which will further increase the budget deficit.

Furthermore, Hassanein said that the purchasing power of the pound will go down, but will not have a clear impact on the exchange rate, which is expected to stabilise at EGP 16-18 until the end of the year.