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Rates go down
Published in Al-Ahram Weekly on 05 - 04 - 2018

As the Central Bank of Egypt continues to cut interest rates, experts are warning that further reductions could be a double-edged sword, reports Safeya Mounir
For the second time in fewer than two months, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) cut the bank's overnight deposit rate and overnight lending rate, which now stand at 16.75 per cent and 17.75 per cent, respectively.
The move was interpreted by economic analysts as a message from the CBE that the austerity measures adopted over the past two years are over and that there will now be a period of monetary expansion.
Interest rates are one of the policy tools available to central banks to help control inflation. Increased interest rates control the amount of liquidity available on the market, thus helping to curb price hikes, but they can also negatively affect some economic activities because they limit the ability to take out loans.
“Cutting interest rates will boost production and local investment by encouraging investors to take out loans to fund new and ongoing projects and will reduce the incentive to deposit money to benefit from high interest rates,” said Daker Abdel-Illah, a member of the Egyptian Businessmen Association's Construction Committee.
Abdel-Illah wanted to see more measures to encourage investment, new projects and relieve investors from financial burdens in order to boost production. Interest rates should go down to 13 per cent starting in the new fiscal year, he added, and then be lowered further to seven per cent in the coming two years to achieve higher growth.
However, many do not expect the CBE to continue lowering interest rates. Instead, it will likely monitor the ripples caused by inflation resulting from the next wave of lifting subsidies on fuel products.
In a statement released last week, the CBE reported that the annual headline and core inflation rates had continued to decline to 14.4 per cent and 11.9 per cent in February 2018, after peaking in July 2017 at 33 per cent and 35.3 per cent, respectively.
“Domestic risks surrounding the inflation outlook include the evolution of inflation expectations, the timing and magnitude of potential subsidy-reform measures, as well as demand-side pressures,” the CBE statement said, adding that “risks from the global economy are oil price developments and the pace of tightening financial conditions.”
According to the US financial firm Bloomberg, the CBE is unlikely to decrease interest rates again until the second half of 2018.
Economic analyst at CI Capital, an investment house, Noeman Khaled said in a televised interview that the CBE would not decrease interest rates further until it had factored in the potential results of an expected hike in fuel prices.
The government is expected to make this move in the coming few months under its plan to gradually lift subsidies and in accordance with its agreement with the International Monetary Fund (IMF).
Beltone Investment Banking, an investment house, has published a report predicting a total decrease in interest rates by 400 basis points (or four per cent) during fiscal year 2017-18 and their maintenance during the first half of fiscal year 2018-19 due to inflation accompanying the lifting of fuel subsidies in the third quarter of 2018.
It forecasts a 35 to 45 per cent increase in the price of fuel products, adding three-to-five per cent to inflation rates.
Increased interest rates are important to individuals who depend on the monthly income generated from bank deposits and similar investments. This income is directly affected by the CBE's decision to decrease or increase interest rates.
Following the CBE's decision last week to decrease interest rates by one per cent, a number of banks lowered their rates on saving certificates by one per cent starting on Sunday.
Banque Misr lowered interest rates by one per cent on all its VIP accounts, the second time it had done so after a similar move in mid-March following a move by the CBE.
The National Bank of Egypt lowered interest rates on its saving accounts by 0.5 per cent. It has yet to make a decision on its investment certificates and deposits, though this will happen this week.
Egypt's three main banks Banque Misr, the National Bank of Egypt and Banque du Caire announced after the CBE's decision to lower interest rates by 200 basis points in February that they would no longer offer certificates with an annual interest rate of 20 per cent.
Banque du Caire and the National Bank of Egypt instead now offer one-year certificates at a 17 per cent interest rate. Three-year certificates are offered at 15 per cent, instead of 16 per cent. This time around however, the two banks said they plan to maintain their 17 per cent certificates unchanged.
Interest rates are also crucial to foreign investors who buy debt instruments offered by the government in the form of treasury bills and bonds, since increased interest rates are an incentive to buy additional instruments.
Economist Reham Al-Desoki said that interest in Egyptian debt was still high, despite the recent reduction in interest rates, and that it was still attractive to foreign investors. Interest rates on three-month treasury bills is 17.6 per cent, and on six-month and one-year treasury bills is 16.5 per cent.
It was unlikely that the limited cuts in rates would deter foreign investors, Al-Desoki said.
At the end of January this year, foreign investments in Egyptian treasury bills had reached $19.8 billion, according to Ahmed Kouchouk, vice minister of finance for fiscal policies and institutional reform.
In a televised interview with Bloomberg, Abdel-Kader Hussein, head of the Fixed Asset Management Division of Arqaam Capital, an investment house, said that interest in the Egyptian market were the best choice for fixed-income investors in emerging markets.
He expected the attraction of the rates to remain “fair” until at least the end of the year.
Lowering interest rates will not affect fixed-income treasury bills and bonds, Beltone Financial Holdings said in a recent report. It added that Egypt was still an appealing choice for investment in fixed-income bills, especially among African markets.
The writer is a freelance journalist.

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