CBE issues biggest auction on Variable Rate Deposit Wednesday

CAIRO – 28 February 2018: The Central Bank of Egypt (CBE) has issued Wednesday its biggest Egyptian Pound Variable Rate Deposit Auction since it adopted such tool in November 2016, with a value of LE 205 billion with a 28-day term.

The average interest rate for the auction was set at 18.24 percent, the second lowest rate since May 2017.

The CBE has started auctions on the Variable Rate Deposits following the flotation of the Egyptian pound in November 2016 as a tool aimed at withdrawing liquidity from the market to curb inflation.

The CBE has offered a total of 74 auctions since the float. The bank started off with offering two auctions a week, but it then reduced them to only one.
Some analysts see this as an indication for more interest rates cuts in the coming months.

In its last meeting this month, the CBE’s Monetary Policy Committee (MPC) cut interest rates by one percent (100bps) for the first time since floatation.

The overnight deposit rate now stands at 17.75 per cent, down from 18.75 per cent, and the overnight lending rate is 18.75 percent, down from 19.75 percent.

The cut came on the back of cooling inflation, which kept dwindling in recent months, reaching 17 percent in January, the lowest rate since flotation.

The CBE is reportedly mulling a new mechanism to set interest rates on open market deposits, aiming to increase its maturities to 12 months, up from the current 28-35 days.

Open Market Operations (OMO) is another tool used by the CBE to absorb liquidity from the market, through which the central bank exchange cash from the commercial banks with government treasuries. This monetary policy tool was introduced in August 2005.

Inflation has skyrocketed in Egypt after the country floated its local currency in November 2016, reaching a record high of 33 percent in July 2017 as a result of the pound losing 50 percent of its value and cutting energy subsides.

In a bid to curb inflation, the CBE increased interest rates by a total of seven percent since the float. The first cut in interest rates came this month. As inflation continues to drop, more cuts in interest rates are expected.

Fitch Rating expected Tuesday that inflation in Egypt will fall further this year but remain in double digits, averaging around 13 percent, assuming that further subsidy reform in July will lead to energy price increases, especially given higher oil prices.

Fitch anticipated in a report that the CBE will cut rates further this year (another 200-300bps) even as global rates rise, while maintaining positive real interest rates.