Egypt’s central bank seen keeping interest rates on hold

CAIRO - 21 May 2017: The Central Bank of Egypt (CBE) is set to consider interest rates late Sunday, amid expectations of keeping them unchanged as monthly inflation rate is set to level off after flotation price shocks.

In its last meeting on March 30, the CBE’s Monetary Policy Committee decided to keep the overnight deposit and lending rates “unchanged” at 14.75 percent and 15.75 percent respectively.

The committee also maintained CBE’s main operation and the discount rate unchanged at 15.25 percent each.

Key policy rates were kept on hold after they saw the last change on November 3, when the CBE raised them by 300 basis points each (3 percent,) the same day it free floated the pound.

Egypt’s headline inflation surged to 32.9 percent year-on-year in April, the highest in 30 years, while the monthly rate of overall price gains eased to 1.8 percent last month from 2.1 percent in March, according to state-statistics body CAPMAS.

While the International Monetary Fund (IMF) seemed to be pushing Egypt to keep interest rates high in a bid to curb a soaring inflation, economists, argue that the monetary policy tool is not projected to be effective anymore in containing inflation that is driven, not by an increase in demand, but rather by higher production costs after the flotation and other reform measures.

Head of Pharos Holding’s Research Department Radwa el-Sweify ruled out a possible rate hike. “Interest rates will actually remain stable, or at current levels, until the fourth quarter of 2017, when we can start to see potential cuts.”

Inflation has accelerated in Egypt on the back of the pound's 50 percent plunge against the dollar after the flotation, coupled with introducing a value-added tax and subsidy cuts. These reforms were necessary for Cairo to sign a $12 billion deal with the IMF to support Egypt's economic reform program over three years.

EFG-Hermes, Middle East and North Africa Senior Economist Mohamed Abo Basha, also believes a rate increase will not bring inflation down. “It is too difficult to take action to control this inflation; nothing but a stronger pound would take it down. This requires a boom in revenues from tourism as well as foreign direct investments,” he explained.

Since December 2015, the CBE raised the rates by 6 percent, raising the cost of government debt without an effective impact of inflation, Abo Basha told Egypt today.
The official exchange rate has stabilized at around LE 18 per dollar, which is well above LE 15.8 per dollar in February and below the historical-high level of LE 19.