In a bid to stop the dollarisation process and encourage people to keep their deposits in Egyptian pounds, Egyptian banks recently raised interest rates on Egyptian-pound-denominated long-term deposits. The National Bank of Egypt, the country's largest public-sector bank, raised interest rates on its three-year Egyptian pound certificates to 12.5 per cent, up from a previous rate of 10.5 per cent. The move prompted other public and private banks to raise their interest rates as well. One source at Crédit Agricole who preferred to remain anonymous said that the bank had raised interest rates on its three-year Egyptian pound certificates to 11 per cent, up from 10.5 per cent. He said that it was difficult for private banks to match the rates offered by public banks because each bank had its own strategy and liquidity pressures. The source ascribed the push by the Central Bank of Egypt's (CBE) monetary policy committee for higher interest rates to the hope that these could help stop the dollarisation process on the back of the deteriorating value of the Egyptian pound. However, he said that this was unlikely to happen given the soaring dollar/pound exchange rates, which he described as being “out of control.” As a result, the source added, the higher interest rates might not be appealing to many people. “People could ignore the 12.5 per cent interest rate and keep their dollars instead, which are constantly increasing in value,” he said. Associate professor of economics at Cairo University Mohammed Hassan is of a similar view, arguing that increasing interest rates will not stop the dollarisation process but “if anything could only slacken the pace.” Hassan said that because of the current deterioration in the value of the Egyptian pound against the dollar, “any hike in interest rates would be insufficient to stop dollarisation.” The US dollar is officially selling for LE6.85, but dollar exchange rates are as high as LE8.9 on the black market. Hassan added that the increasing dollar exchange rates were pushing inflation higher and stripping the local currency of its value. This in turn was prompting people to abandon the local currency and withdraw their deposits in order to turn them into dollars or invest them in real estate or durable commodities. As a result, the banks were raising interest rates on Egyptian pound accounts in order to try to preserve the deposits they already possessed, he said. According to the Central Bank of Egypt, the headline consumer price index (CPI) increased by 2.5 per cent month-on-month in February, the highest monthly increase since August 2010, pushing the annual rate to 8.21 per cent from 4.66 per cent recorded in December 2012. The increased interest rates have come as good news to many people. Doaa Hussein, a housewife whose main income comes from the revenues she receives on her bank deposits, said that she was happy at the increases, which she said were timely given the inflationary pressures the country was witnessing. Sara Adel, 44, also withdrew her deposits from one of the private banks, although she stood to lose a couple of thousand pounds, in order to redeposit the money in one of the public-sector banks to take advantage of the higher interest rates these banks are now offering. It seems that Adel is not the only one, with the source at Crédit Agricole saying that some customers had withdrawn their money from the bank so that they could benefit from the higher interest rates offered by the public-sector banks. As for how long interest rates are expected to remain high, both Hassan and the source said that they would remain high as long as the value of the dollar continued to escalate. “If the dollar exchange rate and the black market are controlled, interest rates can be brought down,” Hassan said. In its meeting last month, the CBE's monetary policy committee decided to raise the overnight deposit rate and overnight lending rate to 9.75 per cent and 10.75 per cent up from their previous levels of 9.25 and 10.25 per cent, respectively. The discount rate was also raised to 10.25 per cent, up from 9.5 per cent. The CBE move was aimed at curbing inflation. “Despite the downside risks to the GDP outlook, the committee judges that disanchored inflation expectations are more detrimental to the economy over the medium term. Hence, a rate hike is warranted,” said the CBE committee in a press statement.
