The Central Bank of Egypt stood its ground keeping interest rates unchanged, Niveen Wahish analyses the significance of the decision Everyone had expected the Central Bank of Egypt (CBE) to follow in the footsteps of US and European central banks and slash interest rates at its meeting last Thursday. But to the surprise, and indeed disappointment of many, the CBE decided to keep its overnight deposit and discount rate unchanged at 11.5 per cent. Many had hoped that the recent drop in the annual headline CPI inflation from 23.6 per cent in August to 21.5 per cent in September would encourage the CBE to cut its rates accordingly. For the past few years, the primary target of monetary policy has been to restrain inflation through the use of monetary tools such as overnight deposit and lending rates. And with inflation at double digit rates since the second quarter of the year, the CBE had no option but to increase its rates likewise. In fact, the Monetary Policy Committee (MPC), which meets every six weeks, raised overnight deposit and lending rates six times this year. Today, however, the situation is different. A statement issued by the CBE following its latest meeting says, "Most of the upside risks to inflation, discussed in the previous MPC meeting, have eased. This comes against the backdrop of improving prospects for international commodity prices, in light of the projected slowdown in global economic activity and the consequent moderation in domestic economic growth. Against this background, the outlook for domestic inflation is better than previously envisaged." Yet the CBE's stance remains unchanged. The MPC kept the overnight deposit and lending rates unchanged at 11.5 per cent and 13.5 per cent respectively. Hanaa Kheireddin, executive director of the Egyptian Centre for Economic Studies (ECES), believes the CBE did well by not making a move at this point. Taking into account that it is not yet clear which way the economy is heading, particularly in the midst of a global financial crisis, "it's safer to wait and see," Kheireddin told Al-Ahram Weekly. Kheireddin does not believe it would be right to compare the actions taken by Egypt's central bank to those taken by central banks abroad. "They do not suffer the double digit inflation rates that Egypt has. For Egypt, the situation is more sensitive," she said. The economist went on to explain that if the CBE were to increase interest rates, it could rein in inflation, but it will likely lead to a recession, particularly in these difficult times. If it were to cut rates, she said, it could help fight a recession, but might push inflation up again. Moreover, in Kheireddin's view a cut in interest rates could lead to unhealthy lending particularly in the area of retail which would fuel inflation further. "This is not the type of lending we are looking for," she said. Others, meanwhile, would have liked to see interest rates go down. Among them is Omar Radwan, executive director of Asset Management, HC Securities and Investment. He believes lower interest rates bode well for the stock market. "Reducing interest rates will allow companies to invest in capital projects that would have otherwise been unfeasible. It implies a reduction in costs, thus more profitability for companies," Radwan said. Nonetheless he trusts that the current CBE administration knows what it's doing. It played a vital role in the economy in the past four years, in reforming the banking sector and helping avoid a crisis. "They know things that are not in public domain," Radwan added. Among the benefits in the CBE's decision to let interest rates stand, Radwan says, is the fact that it makes a point that the banking sector is not facing problems. "It reassures depositors that they can still make good returns on their savings," he told the Weekly. And it has its benefits for the foreign exchange market which has seen the Egyptian pound lose ground since the global financial crisis broke out almost two months ago, dropping from LE5.3 in May to LE5.6 to the dollar. The relatively high interest rates would discourage depositors from relinquishing their Egyptian pound holdings or think about converting their pounds into dollars, thus causing the value of the pound to depreciate further. However, Radwan still believes it is important that interest rates on lending go down. "The CBE should use its leverage to encourage banks to lower their lending rates," he said. Kheireddin agrees that the CBE could encourage banks to lend through tools other than the interest rate. Moreover, she says that banks are already making profit from lending. And they could "encourage lending by easier procedures, for example," she said. Bassant Fahmi, advisor to the Egypt-Saudi Finance Bank, also thinks that the CBE did well by not cutting rates now. She said that a number of banks, which have done some aggressive lending in the area of retail or to industries that may expect to witness a slowdown because of the current crisis, will need to attract liquidity, therefore they start to offer high interest rates. She does not believe lower interest rates will mean a more active stock market. "That is only the case in global markets where this mechanism is alive," said Fahmi. She believes Egyptians always complain that interest rates are high because, rather than depend on self-funding, they take on more loans than they can afford to repay. To rectify this situation, they should either raise their capital or cut down their activity. Fahmi further clarified that lending rates are not solely based on the rate set by the CBE. Other factors are taken into consideration such as the risk factor of the industry or client the loan is going out to. "Trustworthy clients could start receiving loans at very attractive rates," said Fahmi.
