Lower interest rates will bring mixed blessings. Hany Abou El-Fotouh* identifies the potential winners and losers Most if not all countries have cut interest rates in the past six months. Egypt is not an exception. The Central Bank of Egypt (CBE) again moved to reduce the interest rates last month. This was expected since urban inflation slowed to its lowest level since August 2008. The CBE decision was a clear signal to encourage lending. The inflation rate is a key factor that the CBE considers when it decides on the level of interest rates. The continuing drop in inflation, falling to 11.7 per cent in April from 13.5 per cent in February and March 2009, resulted in an accumulated retreat of around 50 per cent down from its peak in August 2008. This move is largely in line with expectations about further downward move of inflation as global price pressures drop. It is believed that overall inflation will fall below 10 per cent by the second quarter of 2009. The recent reduction of the overnight deposit rate by half a percentage point to 9.5 per cent, and overnight lending from 12 per cent to 11 per cent, reduced the gap between the two rates to 1.5 per cent from two per cent. This move makes a lot of sense and is appropriate at this time. Meanwhile, expectations about the local economy are not optimistic. I tend to agree with economists' predictions as they foresee further adverse impact on the domestic growth outlook. On the other hand, the question remains: Who will benefit from the CBE's decision to slash interest rates? The bulk of businessmen hailed the CBE decision. Lower lending rates relieved a huge burden off their shoulders. When banks reduce the interest rates they charge their customers we see companies' repayment capacities improved. It helps them to perform better and retain their workforce instead of curbing costs by sacking workers. Nonetheless, they would likely still look forward to cuts reaching seven per cent. But this decision might be seen as in favour of highly capitalised corporations, not small and medium enterprises (SMEs). Generally, the majority of this segment has a problem borrowing from banks. Until very recently, banks have been maintaining tough conditions for financing SMEs. News about lower deposit rate adds to depositors' agony. Frustration with low yields is exacerbated by fears of a further decline in interest rates, making bank depositors more desperate to find relatively safe alternatives to stow their cash and earn reasonable returns. Indeed, many families rely heavily on the yield of bank deposits as a major source of income alongside what they receive as a pension or fixed salary. There are fears that depositors might change to dollars as the gap between the deposit rate of the Egyptian pound and dollars is narrowing. If this trend continues, demand on dollars would soar. In a declining interest rate environment, the stock market looks relatively attractive. Fund managers anticipate that the declining trend of deposit interest rates might encourage bank customers to switch to money market funds, particularly that the stock exchange has shown notional improvement during the second quarter of 2009. The Monetary Policy Committee confirmed that it would "continue to take the necessary measures to contain the adverse effects of global economic turmoil on the domestic economy, provided that they do not conflict with the price stability objective." Reading between the lines, further cuts in interest rates are to be expected. Central banks around the world have lowered interest rates in a joint effort to get economies back on track. But Egypt is not like the US, where the Federal Reserve is holding interest rates so low, dropping to zero -- the low rate that encouraged people to buy houses they could not afford and banks to take lending decisions they should not have made. All because money was available at a very low cost. Still, policymakers recognise that for every decision there must be some positive aspects and negative ones. It is impossible to satisfy the needs of all groups. For that reason, the best decision is one that serves the interest of the national economy at large and not a particular segment. * The writer is director of policy and corporate affairs at CI Capital Holding.
