Interest rates are down to single digit figures, but has that affected the market significantly? Niveen Wahish finds out The Central Bank of Egypt has made four consecutive cuts to the overnight lending and deposit rates this year. The latest was announced following the Monetary Policy Committee (MPC) meeting end of last week. The MPC cut its overnight deposit rate by 50 basis points (bps) to nine per cent and the overnight lending rate by 50bps to 10.5 per cent. The discount rate was also cut by 50 bps to nine per cent per annum. As in past instances the dropping inflation rate is making it possible for the CBE to carry out these cuts and attempt to contain the adverse effects of the global economic slowdown. According to the CBE's inflation targeting monetary policy, the MPC cuts interest rates when inflation drops and raises it as it increases. This time around the MPC press release said that "annual headline CPI inflation continued to decline in May 2009, reaching 10.2 per cent down from 11.7 percent in April." The CBE further said that "the global financial crisis continues to interrupt the domestic growth momentum," and that "risks to the domestic growth outlook continue to be on the downside while inflationary pressures are subsiding." Since its first meeting earlier this year in February, the MPC has cut the lending rate by 250 bps to 11 per cent and the deposit rate by 200 bps, to 9.5 per cent. Consequently banks have had to adjust the rates offered to clients following each cut. The first to undergo the cuts are the deposits according to Amr Bahaa, director of treasury and capital markets at Piraeus Bank. This, he said, means a cheaper cost of funds, thus higher profitability for the bank. But he said that it is up to each bank to decide how far they want to cut their lending rates depending on their willingness to lend in the first place. Another banker who preferred to remain anonymous concurred. He said that while rates on deposits are at unprecedented lows, rates on lending have not flinched reaching as high as 15 per cent depending on the duration of the loan and extent of credit worthiness of the client. Reham El-Desoki, senior economist at Beltone Financial does not believe the cuts have filtered through to lending rates as banks have been more inclined to cut deposit rates. She does not consider that the cuts have led to a material increase in lending growth, as anticipated by the monetary authorities, considering banks' risk averseness and increased scrutiny of the banks of the requested loans, whether by the household or private business sectors. She cited the restrictions placed by the banks on auto loans, with the onset of the global crisis. Bahaa agrees that banks are reluctant to lend. In fact, he disapproved of the banks which continue to expand on their retail lending saying that this is not advisable particularly since the recession continues and individuals continue to be laid off which might lead them to default on their loans. He said that the banks that continue to generously grant retail loans "should be more concerned about depositors' money." And while the lower rates on deposits should traditionally encourage greater investment in the stock market, it is not having quite the same effect now. El-Desoki said that "the cuts in interest rates may have partially contributed to the pick-up in the stock market". However, she added that "the attractive valuations in the market, the increased liquidity in the market, with more cash being available from previous selling cycles, and the significantly higher returns on investing in the stock market were the main reasons behind the recovery in trading in the market, rather than the interest rate cuts." But one party which is certainly out to benefit is the government which will see its public debt service decline. As El-Desoki put it "the cuts definitely mean a reduction in the cost of debt for the government in the short term as the decline in interest rates generally will translate into a decline in rates on Treasury securities." Businessman Hussein Sabbour, head of the Egyptian Businessmen's Association agrees that the government is the first benefactor of these rate cuts. "What it [the government] is saving in interest rate charges is more than it is spending on the 10 per cent raise in government employee salaries." El-Desoki does not anticipate that the CBE will cut interest rates further this year. In fact this latest cut had come contrary to her expectations given that "growth was showing signs of a possible recovery and money supply growth 5was stable at low levels." But now that the CBE has made the move, she anticipates that "considering that the second half of the year is a period when inflation usually picks up, we expect the CBE would be inclined to hold interest rates steady until the end of the year, possibly, when it could start raising rates again as inflation rises." Bahaa agrees. He does not see interest rates falling further pointing out interest rates in emerging countries are usually within the range of double digit figures, he said. In his opinion, interest rates as they stand today, are a deterrent to depositors at a time when higher savings rates should be encouraged. Bahaa believes that interest rates are the least of investors' worries. In his opinion, what is more important than interest rate is simplifying procedures and getting rid of red tape. Businessman Hussein Sabbour, head of the Egyptian Businessmen's Association agrees. While he believes that lower interest rates on lending have fallen which should encourage more investments, that is the least of his concerns. He wishes to see speedier approval of loans and less bureaucracy.
