Varied expectations on interest rate fate at Thursday’s next CBE meeting

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Expectations among analysts and investment banks varied for the upcoming Central Bank of Egypt (CBE) Monetary Policy Committee (MPC) meeting on the local interest rate next Thursday.

At its last meeting on August 18, the MPC decided to set the base interest rates in the CBE at 11.25% for deposits, 12.25% for loans and 11.75% for the rate of credit and discount and the main transaction of the CBE, after raising these prices by 3% at previous meetings in March and May.

The committee underlined that this decision is in line with the objective of medium-term stability. Monetary policy tools are used to control inflation expectations and reduce inflationary pressures.

Given the initial effects of supply shocks, inflation rates are expected to temporarily rise above the CBE inflation target by 7% (±2%) on average over the course of the fourth quarter of 2022, provided inflation rates decline gradually.

The committee stressed that it will continue to assess the impact of its decisions on inflation expectations and medium-term macroeconomic developments, taking into account the decisions it has taken at its previous meetings to raise rates basic interest.

The committee also stressed that achieving low and stable inflation rates over the medium term is a prerequisite for achieving sustainable growth rates, pointing out that current interest rates depend mainly on expected inflation rates and not prevailing rates.

The CBE recently revealed that the core consumer price index recorded a monthly rate of 0.6% in August 2022, compared to a negative rate of 0.3% in August 2021, and a rate of 1.5 % in July 2022, and the annual rate of core inflation increased to 16.7% in August 2022 from 15.6% in July 2022.

Tarek Metwally, former vice president of BLOM Bank Egypt, said that inflation is a phenomenon that all countries in the world suffer from, whether developed or developing, whether developed or emerging, and that the Egypt is no exception. He pointed out that rising oil, major commodity and interest prices globally increase inflationary pressures locally, in addition to continued inflationary pressures locally.

Metwally explained that there are severe pressures on the state’s foreign currency resources, which is causing the Egyptian pound to fall against the US dollar, which is one of the most important current and future factors affecting inflation, and that requires quick and strong action. to cope with inflation.

According to Metwally, it is very likely that the interest rate at the next MPC meeting would increase. He pointed out that the rate of increase depends on the policy that the CBE will pursue in the coming period on the liberalization of the exchange rate.

Metwally believes that it is best to proceed with a sudden drop in the price of the Egyptian pound, in light of appropriate conditions, accompanied by a 3% interest rate hike and a savings ship for a specific period of at least one year, at an attractive interest rate. All this is aimed at increasing the attractiveness of the Egyptian pound for investment and compensating those who will abandon the dollar, in addition to liberalizing import restrictions, especially with regard to production needs and spare parts, initially until economic conditions stabilize.

He explained that the sudden devaluation of the pound and the increase in the interest rate would have a negative impact on the general state budget, in addition to the increase in the prices of raw materials, but that its effects could be reduced. by a set of social protection programs for low incomes. high-income people, in return for the benefits of increasing tourism and export competitiveness, creating job opportunities and attracting investment.

Metwally stressed that the state of uncertainty and high inflation across the world, during the Russian-Ukrainian war, the global conflict and its economic repercussions, necessitate rapid and proactive measures to deal with the crisis, and solutions that require more courage and wisdom. He said monetary and fiscal policy makers are going through a critical period as all these global crises are happening which negatively affects everyone.

Moreover, Radwa El-Swaify, head of the research sector at Pharos Holding, believes that the CBE will set interest rates at the MPC meeting next Thursday.

She pointed out that this belief stems from the CBE’s concern not to add pressure on the general state budget with the relative calm of global commodity prices and the flow of inflation in a specific path. The decline will likely start in early April 2023, and therefore interest rate setting is aimed at supporting output and the government budget.

Furthermore, El-Swaify said that raising the interest rate is not an excluded possibility, especially if quick action is taken on exchange rate flexibility before the date of the meeting.

Similarly, Zilla Capital expected the CBE to set interest rates at next Thursday’s MPC meeting.

The company explained in a report it released that the nature of the Egyptian economy and its balance of trade makes the effect of rising interest rates on easing inflation very limited. He pointed out that the external variables regarding oil prices, as well as the food price index, can indicate that the worst in terms of import inflation is already over, which can be a positive indicator.

He pointed out that the increase in the interest rate would not attract foreign investors to the Egyptian pound and would not support the liquidity reserves, because the dollar bonds have different maturity dates at 15%, which would constitute an obstacle to investing in Egyptian bonds with a yield close to 12%.

Last Thursday, the CBE unveiled the detail of the inflation rate with its general and basic indicators in August 2022, and the developments in commodity prices during this month.

Moreover, the CBE said that in August 2022, the annual headline urban inflation rose to 14.6% from 13.6% in July 2022. The annual inflation figure in August 2022 was mainly impacted by non-food inflation, and further supported by food inflation. This comes as monthly headline urban inflation recorded 0.9% in August 2022 from 0.1% in August 2021.

Monthly headline urban inflation in August 2022 reflected rising prices of non-food items across the board; a higher contribution from services, driven by higher prices for expenses in restaurants and cafes, rents, domestic transport and private healthcare; a higher contribution from retail items, driven by higher prices for household cleaning products, clothing and footwear, and personal care products; and a higher contribution from regulated items as tobacco prices rose for the second consecutive month. This increase reflects an increase in market prices for tobacco products that is different from the increase announced by Eastern Company on September 4, 2022.

Monthly headline inflation was further supported by food items, with the positive contribution from fresh vegetables being partially offset by the negative contribution from staple foods and fresh fruit.

On an annual basis, headline inflation in August 2022 was driven by the higher annual contribution from non-food items, as annual non-food inflation continued to rise, for the tenth consecutive month, to register 10.8% in August 2022, compared to 9.9% in July. 2022, which is its highest rate since May 2019.

In addition, annual food inflation increased from 22.4% in July 2022 to 23.1% in August.

Driven by higher large-scale annual contributions, annual core inflation has continued to rise over the past twelve months, recording 16.7% in August from 15.6% in July 2022, the highest rate higher since December 2017. This comes as monthly core inflation recorded 0.6% in August 2022, from -0.3% in August 2021.

National annual inflation and annual rural inflation increased to 15.3% and 16.0% in August 2022 from 14.6% and 15.6% in July 2022, respectively.

Fresh vegetable prices rose 15.0%, while fresh fruit prices fell 4.7%. Together, they contributed 0.30% to monthly headline inflation. The positive inflation for fresh vegetables, although stronger than the average recorded in August historically, is considered generally normal given that it comes after three consecutive months of declines compared to seasonal trends.

Market rice, dairy, red meat, pasta, fat prices increased by 8.3%, 2.3%, 0.5%, 2.7% and 2% respectively and contributed 0.11%, 0.08%, 0.02%, 0.02% and 0.02%. % respectively to monthly headline inflation.

Poultry and egg prices fell 9.7% and 1.7% respectively and contributed -0.43% and -0.02% respectively to monthly headline inflation.

Prices of other food staples, including market sugar, bread, pulses, tea, among others, also rose to contribute 0.11% to monthly headline inflation.

Services prices increased by 1.0% and contributed 0.32% to monthly headline inflation.

This is mainly due to higher prices for expenses in restaurants and cafes, rental values, outpatient services, private hospitals, domestic transport and pilgrimages, among others.

Retail prices rose 1.4% and contributed 0.19% to monthly headline inflation.

This is mainly due to the increase in prices for household cleaning products, clothing, the purchase of vehicles, personal care products, among others.

Prices for regulated items increased by 0.7% and contributed 0.16% to monthly headline inflation. This is mainly due to the rise in tobacco prices.

Monthly core inflation was affected by price changes of the aforementioned elements of the core CPI. Services contributed 0.45% to monthly core inflation. Additionally, retail items contributed 0.26% to monthly core inflation.

Meanwhile, food staples contributed -0.12% to monthly core inflation.



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