Falling interest rates are leaving small depositors with their backs against the wall, Niveen Wahish reports Amal El-Masri is worried sick. Her husband died and left LE200,000. She thought that with that she was settled for life. She deposited the money in the bank and lives off LE2,000 each month, which she gets in interest. Luckily she made the deposit just before interest rates started falling. Nonetheless, she is worried about the future in light of falling interest rates. Indeed her worries are not unjustified. On Thursday the Central Bank of Egypt (CBE) decided to cut the overnight deposit and overnight lending rates by 50 basis points (bps) to 10 per cent and 12 per cent respectively. It also cut the discount rate by 50 bps to 10 per cent per annum. The discount rate is the rate at which the CBE lends to banks. This is the second cut by the CBE's Monetary Policy Committee (MPC) in less than two months. It is a reaction to a drop in annual headline CPI inflation according to the CBE of 0.8 per cent, falling from 14.3 per cent in January to 13.5 per cent in February. This move conforms to the CBE's announced objective of maintaining price stability. According to a CBE press release, the downward trend in headline inflation comes on the back of the decline in domestic food inflation, which fell from 25.5 per cent year on year in September 2008 to 14.4 per cent in February this year. The CBE's press release further stated that "the lower inflationary pressures driven by lower international food prices and slower domestic economic growth currently project that annual inflation will fall towards the CBE's comfort zone by mid-2009." Although many in the business circles may be excited about the interest rate drop, believing it will help boost investment at a time of slowing growth, the repercussions for average individuals are worrying. Uncertain economic conditions leave depositors at a dead end. Tareq Amer, chairman of the National Bank of Egypt (NBE), told Al-Ahram Weekly during a press conference that he does not expect the flow of deposits to be affected by the lower interest rates, not only because NBE offers the highest interest rates on long-term deposits, but mainly because banks remain the most secure investment in the economy at the moment. Individuals are no longer inclined to place their lifetime savings in the stock market because of the fluctuations and sharp drops in share prices. And real-estate would not be an investment that would be easy to liquidate. This leaves banks as the only choice. Investment and finance consultant Enayat El-Naggar thought that the CBE would fix the interest rate rather than lower it. To her the 50 bps cut is not that big a cut to make a difference to investors, in her view. In the meantime, she also believes small depositors, such as pensioners and others whose only source of income is the interest rate on their deposits, have to accept whatever they get, because banks are still the safest investment. "These small savers are not cut out to invest in the stock market and they will not jeopardise their savings by starting up a project," El Naggar said. She believes that their situation might improve once the inflation rate drops below the interest rate. If that happens their earnings would give them greater purchasing power, she added. Doha Mounir, professor of finance at the American University in Cairo, also believes that small savers simply "have no option. And they could see their savings eaten up." Mounir suggested that the government could help out by giving tax breaks, provided they are still income earners. "That would have the same effect as giving them extra money in their hands," she said. On the other hand, Mounir believes that the move to cut interest rates will help the government to procure funding at a reasonable cost for its economic stimulus plan, as well as the annual raise for government employees. In her opinion, resorting to borrow from banks provides immediate funding and will put to good use funds that lay idle in the banking sector.
