Banks to discuss fate of deposit, lending interests this week following CBE rate cut

NBE, Banque Misr to keep interests of fixed-rate saving certificates stable, cut those of variable-rate certificates by 1%

Banks operating in the Egyptian market will hold on Sunday high-level meetings of their asset-liability committees (ALCO) to discuss the fate of their deposit and loan interest rates after the Central Bank of Egypt's (CBE) decision to cut the basic interest rate by 1%.
Meanwhile, two of the largest banks operating in the Egyptian market – the National Bank of Egypt (NBE) and Banque Misr – have decided to keep the interest rates of fixed-rate saving certificates unchanged and only change the interest rates of variable-rate certificates.
The NBE maintained the interest rate of its three-year fixed-rate certificates at 15% with the yield disbursed every month and kept a rate of 15.25% for the certificates with the yield disbursed every three months, said Yehya Aboul Fotouh, the bank's vice chairperson.
Interests fell to 16% instead of 17% only for the bank's variable-rate three-year certificates, with the yield disbursed every three months, Aboul Fotouh added, praising the CBE's decision to cut interest rates, noting that it would attract investments to the Egyptian market.
"This decision comes in the light of the positive difference emerged between the announced inflation rates and banks' interest rates," Aboul Fotouh said, pointing out that the stability in dollar exchange rates by the Federal Reserve System – the central banking system in the United States – has helped the CBE cut the interest rates with abundance of foreign reserves.
Similarly, Banque Misr has decided to keep the yields of three-year certificates at the same level of 15%; fixed and paid monthly without changes. On the other hand, the bank has decided to reduce the interest rate of three-year variable-rate certificates by 1% to 16% instead of 17%.
This week, the two state-run banks will be holding some meetings to discuss the fate of the interest rate of the rest of saving instruments as well as loans.
In a related context, interest rates of many saving certificates and loan products related to the main prices of yield have declined once the CBE issued its decision to reduce these prices by 1%.
The CBE's Monetary Policy Committee (MPC) decided last Thursday to cut the overnight deposit and lending rates and the rate of the main operations by 100 basis points (BPS) to 15.75%, 16.7%, and 16.25% respectively. The discount rate was also cut by 100 BPS to 16.25%.
According to the CBE's statement, headline and core inflation rose to 12.7% and 8.6% in January respectively due to unfavorable base effects.
The MPC said that this step comes after headline inflation declined to 12.0% in December 2018 due to the reversal of the transitory supply shock related to vegetables. As a result, the CBE's initial inflation target of 13% (±3%) for the fourth quarter (Q4) of 2018, which was announced in May 2017, has been achieved.
While real GDP growth increased slightly to 5.5% in Q4 2018 compared to 5.3% in Q3 2018, and the unemployment rate declined to 8.9% from 10.0%, its lowest level since December 2010.
Furthermore, the statement indicated that net external demand continued to support economic activity while private domestic demand remained contained.
On the other hand, the expansion of global economic activity weakened, and the tightening of financial conditions eased, and trade tensions continued to weigh on the global outlook.
"The MPC decided to cut key policy rates by 100 BPS. This remains consistent with tight real monetary conditions and with achieving the inflation target of 9% (±3%) in Q4 2020 and price stability over the medium term," the statement concluded.
This comes at a time when the market is anticipating the trend of yield prices on the treasury bills and bonds to be launched this week in order to understand how much they were impacted by the decision of CBE to reduce interest rates.
According to Mohamed Abdel Aal, a board member of Suez Canal Bank and the Arab Sudanese Bank, the decision of CBE to reduce the main yield rates is expected to lead to a decrease in the cost of funding, hence, encourage economic growth. It might also lead to a decline in the yield of treasury bills and bonds launched by the government, which would help reduce local debt, hence, reduce the state budget deficit.
He added that reducing the interest rate and funding costs is expected to reduce the prices of locally produced goods which would help lower inflation rates.
"It is not expected for this reduction in the prices of interests to lead to any change in exchange prices, while a positive impact is expected on the performance of the Egyptian Exchange (EGX)," Abdel Aal said.
Haitham Abdel Fattah, head of the Treasury and Capital Market sector at the Industrial Development Bank (IDB), said that the decision of CBE was greatly expected after it had managed to boost its control over the inflation and reached its targeted levels.
With this decision, the CBE showed that it adopts expansionary monetary policies that target real and sustainable growth rates, Abdel Fattah added, noting that this decision will have a positive impact on all aspects of the economy.
He pointed out that ALCO at the IDB will hold a meeting this week in order to discuss the impact of the decision on all saving instruments of the bank.