CBE expected to increase interest rate by 1% on Thursday

High inflation, application of VAT would raise Egyptian pound's interest rate by 2% by the end of 2016, says analyst

The Monetary Policy Committee affiliated with the Central Bank of Egypt (CBE) will hold its regular sixth meeting of the year on Thursday to discuss the future of basic yield in the CBE, which is the leading indicator for the direction of interest rates on the Egyptian pound in the local market.
It comes amid strong expectations in the market that the committee will increase the interest rate by 1%, so as to limit the negative effects of inflation, which has witnessed successive increases in recent months.
The CBE announced a few days ago that the inflation rate registered 0.61% in August, compared to 0.25% in July 2016.
The annual inflation rate has reached 13.25% in August, compared to 12.31% in July.
According to the CBE, the Consumer Price Index (CPI) reported by the Central Agency for Public Mobilization and Statistics (CAPMAS) registered a monthly increase of 1.93% in August, compared to 0.74% in July.
The annual inflation rate reached 15.47% in August, compared to 14% in July.
Tamer Youssef, head of treasury sector in one of the foreign banks operating in the domestic market, expected that the inflation rate will witness further increases due to the application of the value-added tax (VAT), as well as the beginning of the first academic semester, which usually witnesses an increase in the prices of some goods.
He added that the interest rate on the pound is expected to increase by 2% before the end of the year, while it will range between 0.75% and 1% during the monetary policy committee's meeting scheduled on Thursday.
The CBE's current priority is to contain inflation which means there is no room for discussion about increasing interest rates on investment or growth at the moment, according to Youssef.
He added that Egypt will begin implementing the economic reform programme after it obtains the International Monetary Fund (IMF) loan. The programme will be implemented in one to one and a half years, and during this period, the focus will be on fixing distortions suffered by the economy, as well as controlling inflation so that low-income citizens are not affected by the reform programme.
The Monetary Policy Committee decided at its meeting held on 28 July to increase the prices of basic earnings at the CBE by 1%. With this increase, the deposit rate reached 11.75%, the lending rate reached 12.75%, and the price of credit and debit reached 12.25%.
It is expected that the committee will increase prices again by 1%. With this increase on the deposit and lending rate, and the price of credit and debit will reach 12.75%, 13.75%, and 13.25% respectively, according to the research department at Prime Investment.
Prime Investment attributed these expectations to successive hikes witnessed by the general and basic index inflation rates, and this is a strong indication of the intensity of inflationary pressure faced by the economy.
Prime Investment expects the inflation rate during the fiscal year (FY) 2016/2017 to reach 12.9%, compared to the earlier anticipated 12%. This is due to the application of the VAT, the expected increase in energy prices, partially ending subsidies on petroleum products (expected to occur at the beginning of 2017), the floating of the Egyptian pound (expected to occur immediately upon receiving the first tranche of the IMF loan), in addition to the foreign currency crisis, and the wide gap between the price of the official exchange rate and the informal exchange rate and the consequent increase in the prices of imported goods.