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Monetary easing continues
Published in Ahram Online on 29 - 09 - 2020

Last Thursday, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) went against expectations by deciding to cut interest rates by 50 basis points.
The MPC cut the overnight deposit rate, overnight lending rate, and main operations rate by 50 basis points to 8.75 per cent, 9.75 per cent, and 9.25 per cent, respectively. The discount rate was also cut by 50 basis points to 9.25 per cent.
“The reductions in policy rates provide appropriate support to economic activity, while remaining consistent with achieving price stability over the medium term,” a MPC statement said.
Observers had been expecting the CBE to keep rates unchanged, especially since it had cut 300 basis points in one go during an unscheduled meeting in mid-March. The exceptional meeting and ensuing decisions at the time were a preemptive move by the CBE to support economic activity, especially businesses and households following the outbreak of the coronavirus pandemic.
At a time when other central banks are tightening rates to fend off inflation, the CBE is continuing on its easing path, said a note prepared by Amr Elalfy, head of research at Prime Securities, an investment bank. He gave the example of the Central Bank of Turkey, which had hiked rates by 200 basis points on Thursday.
The MPC statement pinned the decision on weak inflation, saying that annual headline urban inflation had declined to 3.4 per cent in August from 4.2 per cent in July, the second lowest rate recorded in almost 14 years, after the 2.4 per cent inflation rate recorded in October 2019.
“Annual headline inflation continued to reflect muted inflationary pressures, registering below six per cent since February 2020,” the MPC statement said, adding that the decline in annual headline urban inflation had been driven by the lower annual contribution of food items, which more than offset the slightly higher annual contribution of non-food items.
In the fourth quarter of 2020, average annual headline inflation is expected to hover around the lower band of the inflation target of nine per cent (±3 percentage points), the statement said.
The CBE also cut the rates with an eye on stimulating growth. Elalfy wrote that Egypt's positive economic growth, the highest in the Middle East and North Africa (MENA) region, needed to be sustained by stimulating corporate credit growth.
According to the CBE statement, preliminary figures show that real GDP growth for fiscal year 2019-20 recorded 3.5 per cent, down from 5.6 per cent in the previous fiscal year. Meanwhile, the unemployment rate recorded 9.6 per cent in the second quarter of 2020, up from 7.7 per cent in the first quarter of 2020, reflecting the impact of Covid-19 on the real economy.
Dahlia Al-Hawari, a former advisor to the minister of investment, does not believe the rate cuts are an effective way of attracting investment, however. Rather than an interest rate cut across the board, Al-Hawari prefers the selective interventions that the CBE has been implementing recently. Last year, the CBE launched an initiative in support of small and medium-sized enterprises in the industrial, tourism, and real-estate sectors.
The problem with interest rate cuts across the board is that these affect the purchasing power of a large segment of society that depends on yields on savings instruments such as deposit certificates for an income, Al-Hawari said. That segment may not have an alternative for their savings, she said.
At the moment, she said that the government was the only benefactor from the rate cuts because it would be paying less on its domestic borrowing. Egypt's public domestic debt stood at around 67 per cent of GDP during the first quarter of 2019/2020, according to figures released in February.
When the CBE lowered interest rates by 300 basis points in March, the two state-owned banks, the National Bank of Egypt and Banque Misr, had provided an exceptional savings instrument offering a 15 per cent yield. Those were cancelled last week, even before the CBE's decision on rates, though they had attracted around LE450 billion in savings.
According to El-Hawary, the best alternative for the segment of society that relies on savings certificates, now that rates have been cut, would be for major projects to be offered on the stock market through initial public offerings (IPOs). These could attract a wide base of small investors who would trust in government projects, much like the earlier Suez Canal certificates.
The government was able to collect LE64 billion by offering investment certificates to finance the expansion of the Suez Canal. More such projects were needed to prompt growth and create jobs, Al-Hawary said. Offering them as an IPO would breathe life back into the stock market, she added.
On a similar note, Mona Bedeir, senior economist at Prime Securities, believes the rate cuts will have a limited effect on the lending activity of the private sector, which already has access to cheaper credit through CBE initiatives.
She said in a research note that there would not be an effect on demand for government debt instruments, as foreign inflows into the debt market were still below pre-coronavirus levels. “Carry trade inflows would rather be a function of the volatile environment, given the US elections and global uncertainty triggered by threats of a second wave of Covid-19,” she said.
The CBE may have wanted to push back against the recent appreciation of the pound, said Capital Economics. The currency has risen by a further one per cent against the dollar since the last MPC meeting and recently hit its strongest level since March, the London-based research consultancy said. The dollar is currently trading at around LE15.8.
High real interest rates have been a key factor supporting the currency in recent months, it said.
Looking ahead, observers believe the CBE is likely to continue its monetary easing policies, though they differ on how soon another rate cut could be expected. While Capital Economics says more cuts could be expected in 2021, Prime Securities sees at least one more rate cut, possibly of the same size before year-end.
*A version of this article appears in print in the 1 October, 2020 edition of Al-Ahram Weekly.

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