CBE re­views in­ter­est rates on Thurs­day

MPC CUT IN­TER­EST RATES TWICE THIS YEAR, KEPT THEM UN­CHANGED DUR­ING 4 CON­SEC­U­TIVE MEET­INGS

The Daily News Egypt - - Front Page - By Hos­sam Mounir

The Mon­e­tary Pol­icy Com­mit­tee (MPC) of the Cen­tral Bank of Egypt (CBE) will hold its sev­enth pe­ri­odic meet­ing on Thurs­day 15 November 2018, to dis­cuss the fu­ture of its ba­sic in­ter­est rates, which is the main in­di­ca­tor of in­ter­est rates on the Egyp­tian pound.

Since the be­gin­ning of this year, the MPC held six meet­ings, dur­ing which the com­mit­tee cut in­ter­est rates in the first two meet­ings on 15 Fe­bru­ary and 29 March by 1% in each meet­ing.

Dur­ing the fol­low­ing four meet­ings held by the MPC on 17 May, 28 June, 16 Au­gust, and 27 Septem­ber, the in­ter­est rates re­mained un­changed at 16.75% for de­posits, 17.75% for loans and 17.25 for main op­er­a­tions, cred­its, and dis­counts.

In the MPC’s state­ment dur­ing the last meet­ing on 27 Septem­ber 2018, it de­clared that “an­nual head­line in­fla­tion rose to 14.2% in Au­gust 2018 from 11.4% in May 2018, while an­nual core in­fla­tion con­tin­ued to de­cline for the 12th con­sec­u­tive month to record 8.5% in July 2018, be­fore in­creas­ing slightly to 8.8% in Au­gust 2018. As an­tic­i­pated, up­ward ad­just­ments of reg­u­lated prices as well as higher prices of fresh fruits and veg­eta­bles con­trib­uted to the widen­ing spread be­tween head­line and core in­fla­tion since June 2018.”

Fur­ther­more,the state­ment added, “an­nual real GDP growth sta­bilised in 2018 the sec­ond quar­ter (Q2) at the 5.4% rate reg­is­tered in the pre­vi­ous quar­ter, which was mainly driven by net for­eign de­mand, as well as by do­mes­tic in­vest­ment. Mean­while, job cre­ation sup­ported the de­cline of the un­em­ploy­ment rate to 9.9% in Q2 of 2018, the low­est rate since Q4 of 2010.”

The pass-through to do­mes­tic in­fla­tion from de­vel­op­ments in emerg­ing mar­ket (EM) economies re­mained con­tained due to sta­bil­i­sa­tion and struc­tural poli­cies which sup­port im­prov­ing macroe­co­nomic fun­da­men­tals.

The MPC de­cided that keeping key pol­icy rates un­changed re­mains con­sis­tent with achiev­ing the tar­get path for head­line in­fla­tion which was an­nounced in May 2017, namely 13% (±3 %) in Q4 of 2018, and sin­gle dig­its af­ter the tem­po­rary ef­fect of fiscal sup­ply shocks dis­si­pate.

“The MPC closely mon­i­tors all eco­nomic de­vel­op­ments, and will not hes­i­tate to ad­just its stance to achieve its man­date of price sta­bil­ity over the medium term,” it con­cluded.

On Satur­day 10 November, the Cen­tral Agency for Pub­lic Mo­bil­i­sa­tion and Sta­tis­tics an­nounced an an­nual in­fla­tion rate of 17.5 % in Oc­to­ber 2018, com­pared to 15.4 % in Septem­ber 2018.

The monthly in­fla­tion rate rose to 2.8 % in Oc­to­ber from 2.6 % in Septem­ber.

Ac­cord­ing to Mo­hamed Ab­del Aal, a well-known bank­ing ex­pert, it is not nec­es­sary for every meet­ing of the CBE’s MPC to be ac­com­pa­nied by a new change in ex­ist­ing in­ter­est rates.

He pointed out that the CBE is the one with the tools, tech­niques, in­for­ma­tion and data, and most im­por­tantly the spe­cialised ex­per­tise which has the vision and the an­a­lyt­i­cal abil­ity, to take such an im­por­tant de­ci­sion which is di­rectly linked to the core of mon­e­tary pol­icy, in or­der to en­sure the suc­cess of the im­ple­men­ta­tion of the eco­nomic re­form pro­gramme so far.

“Al­though the MPC kept in­ter­est rates un­changed at four con­sec­u­tive meet­ings, I think that the fac­tors im­pact­ing the de­ci­sion to raise, and fix in­ter­est rates may be con­flict­ing,” Ab­del Aal in­dicted.

There are fac­tors that in­di­cate the ne­ces­sity of in­creas­ing the rates, while other fac­tors push against that, to keep rates un­changed or even cut them, ex­plained the bank­ing ex­pert, adding “All op­tions are on the ta­ble.”

The next de­ci­sion of the MPC will be one of two sce­nar­ios, the first is to raise in­ter­est rates by a full per­cent­age point, ac­cord­ing to Ab­del Aal. He re­marked that the CBE may re­sort to this sce­nario in or­der to evade some un­der­ly­ing and po­ten­tial in­fla­tion­ary pres­sures, and to pre­serve the at­trac­tive­ness of the Egyp­tian pound, in terms of the ex­change rate and re­turn prices to en­cour­age for­eign in­vestors and ex­pa­tri­ate re­mit­tances, as well as to pro­tect the in­ter­ests of de­pos­i­tors from the house­hold sec­tor,in ad­di­tion to the com­pe­ti­tion faced from other coun­tries that in­crease in­ter­est rates due to eco­nomic in­sta­bil­ity.

How­ever, Ab­del Aal be­lieves that this sce­nario faces many re­sis­tance points to be con­sid­ered, not­ing that the most im­por­tant of th­ese is the high cost of lo­cal govern­ment loans, thus in­creas­ing the debt bur­den.

He ex­pressed that the lo­cal pub­lic debt is es­ti­mated at EGP 3.6tn, with in­ter­est of EGP 510bn,which means that any 1% in­crease in in­ter­est rates adds EGP 30-35bn to the debt.This means that the de­ci­sion to raise the in­ter­est rate may con­tra­dict the Min­istry of Fi­nance’s strate­gic ob­jec­tive of re­duc­ing the deficit rate in the state bud­get.

Ac­cord­ing to Ab­del Aal, the sec­ond thing that could pre­vent the CBE from rais­ing in­ter­est rates.which is the high fi­nanc­ing costs of var­i­ous eco­nomic ac­tiv­i­ties, which might hin­der the suc­cess of tar­geted eco­nomic growth rates.

He pointed out that a third thing which may face an in­ter­est rate surge is the in­fla­tion.“Al­though the an­nual in­fla­tion rate in Septem­ber 2018 fell to 16% from 14.2% in Au­gust, the an­nual rate of core in­fla­tion recorded 8.6% in Septem­ber against 8.8% in Au­gust, sug­gest­ing that in­fla­tion fig­ures may be mov­ing in a down­ward trend un­til the end of the year.”

He added that this may mean that the cur­rent in­fla­tion rate, un­der the present level of in­ter­est rates, is al­ready in a bal­anced course, with the achieve­ment of the mon­e­tary pol­icy ob­jec­tive of reach­ing an in­fla­tion rate of 13% (+/-) 3% at the end of this year.

How­ever,Ab­delAal nothed that,on the other hand, there is still a dif­fer­ence be­tween the in­ter­est rates at the CBE at 3%, which gives the CBE the chance to fix the rates for now.

As stated by the well-known bank­ing ex­pert, the sec­ond sce­nario be­fore the MPC at its next meet­ing is to sta­bilise the in­ter­est rates, which is more likely in this cur­rent phase.

He ex­plained that sta­bil­is­ing in­ter­est rates, with the rel­a­tive bal­ance of other do­mes­tic eco­nomic in­di­ca­tors, achieves a rea­son­able con­stancy point, which in turn brings the great­est value-added to all par­ties, while ig­nor­ing the fac­tor of ris­ing in­ter­est rates in some de­vel­op­ing coun­tries com­pet­ing with us, given that th­ese coun­tries are fraught with po­lit­i­cal and eco­nomic risks, thus mak­ing their high in­ter­est rates less at­trac­tive.

“It can be said that ac­cord­ing to the de­vel­op­ment of lo­cal and global events, the rais­ing of in­ter­est rates is the­o­ret­i­cally prefer­able, but on the other hand, there are things to take into ac­count and can be weigh in favour of keeping rates un­changed to the end of this year,” he con­cluded.

Tarek Metwally, a bank­ing ex­pert, ex­pected the MPC to keep rates un­changed on Thurs­day.

He ex­plained that the cur­rent in­fla­tion rates, which are in line with the objectives of the CBE, favours this prospect.

The CBE is ar­dent to main­tain for­eign ex­change in­flows to­wards Egypt, and thus main­tain its for­eign ex­change re­serves, con­sid­er­ing the re­cent strikes which hit EMs and led to count­less in­vest­ments shift­ing away to more de­vel­oped coun­tries, Metwally dis­closed.

“The ex­pected in­creases in oil prices glob­ally and their im­pact on bud­get deficits,and the prospects of rais­ing the price of gaso­line and petroleum de­riv­a­tives lo­cally again, and the im­pact on in­fla­tion in the next pe­riod, are all fac­tors driv­ing in the di­rec­tion of sta­bil­i­sa­tion of in­ter­est rates,” he con­cluded.

SEV­ERAL FAC­TORS URGE IN­TER­EST STA­BIL­I­SA­TION, IM­POR­TANTLY IN­CREASES IN OIL PRICES, IM­PACT ON BUD­GET DEFICIT, IN­FLA­TION, SAYS METWALLY MPC AF­FIRMED IN ITS LAST MEET­ING THAT THE CUR­RENT LEVEL OF IN­TER­EST RATES IS AP­PRO­PRI­ATE AT PRESENT TO ACHIEVE IN­FLA­TION TAR­GETS

Since the be­gin­ning of this year, the MPC held six meet­ings, dur­ing which the com­mit­tee cut in­ter­est rates in the first two meet­ings on 15 Fe­bru­ary and 29 March by 1% in each meet­ing

Mo­hamed Ab­del Aal, a bank­ing ex­pert

Tarek Metwally, a bank­ing ex­pert

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