دبلوماسية

CBE to decide fate of local interest rates heading into 2021-end

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its eighth and final periodic meeting in 2021 to discuss the fate of the base interest rates, which are the main indicator of the direction of the Egyptian pound’s interest in the local market in the short term.

The committee decided, during its 28 October meeting, to keep the base interest rates unchanged for the eighth time in a row, at 8.25% for deposit, 9.25% for lending, and 8.75% for the credit and discount rates and the main operation.

The MPC said those rates were appropriate at the time, and consistent with the inflation target of 7% (±2%) on average during the fourth quarter (4Q) of 2022.

Mohamed Abdel Aal, a banking expert, said that despite the current global inflationary wave, the Central Agency for Public Mobilization and Statistics announced a decline in Egypt’s annual inflation in November for the second month in a row, after consecutive increases over five months. Annual Inflation fell to 6.2% compared to 7.3% in October, and most importantly, the monthly rate declined to zero, compared to 1.7% in the previous month.

He added: “The core inflation in November – computed by the CBE – which does not include the values ​​of highly volatile or seasonal items, recorded 5.8% up from 5.2% in the previous month. Both rates, even with the decline of the first and the rise of the second, are still below the CBE’s target until 4Q 2022.”

He pointed out that there were many factors that led to our inflation rate not being affected sharply by imported inflation, and that the transmission of the imported inflationary wave needs a period that the import and shipping cycle requires not less than three months on average, and from here it can be said that the expected effect from imported inflation on the Egyptian inflation rate will be modest, and we expect the inflation rate to continue until the end of the year as a single digit below the target rate from the Central Bank.

According to Abdel Aal, if those expectations are correct, thinking about the possibility of raising interest rates may be unjustified, and that the predominant trend will be to fix interest.

He added that one of the reasons that may justify fixing the interest also is to hedge against potential risks of generating stagnation in some economic sectors, pointing out that many fear the expected repercussions of the new variant, Omicron.

Raising interest rates may not be practical at the present time, especially as the CBE continues to support the household sector by providing savings vessels to increase this segment’s income and increase consumption.

Abdel Aal pointed out that the fear of the impact of the United States and the European Union raising interest rates on the flow of foreign indirect investment in government public debt securities is a matter that is postponed to the beginning of next year, as those countries, along with China, preferred not to raise interest rates this year for fear of the repercussions of the Omicron at a time when we have stable economic indicators, the most important of which are the stability of the exchange rate, the decline in the annual general inflation rate, and the continuous growth of the monetary reserve.

Moreover, Tarek Metwally, a banking expert, expected that the MPC would stabilize its interest rates at Thursday’s meeting.

He stressed that despite the increase in the annual rate of core inflation to 5.8% in November 2021, compared to 5.2% in October 2021, it is still within the target range set by the CBE of 7% (±2%) on average during 4Q 2022.

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