Central Bank of Egypt expected to maintain base interest rates next Thursday

Main factor affecting direction of interest rates on Egyptian pound is inflation situation during coming period, says Mohamed Abdel-Aal

The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) will hold its second periodic meeting of 2021 next Thursday, to discuss the fate of the base interest rates.
These rates are the most prominent indicators of the direction taken by interest rates in the local market in the short term.
At its 4 February meeting, the MPC decided to keep the overnight deposit and lending rates at 8.25% and 9.25%, respectively, and to keep the CBE's credit, debit, and main operation rates at 8.75%.
In its statement on the decision, the MPC said that this level of base rates is appropriate at the present time. It is also consistent with achieving the target inflation rate of 7% (±2%) on average during the fourth quarter (Q4) of 2022, and price stability in the medium term.
On Wednesday, the CBE said that its consumer price index (CPI) recorded a monthly rate of 0.3% in February 2021, compared to 0.2% in February 2020 and 0.5% in January 2021. Meanwhile, the annual core inflation stabilised at 3.6% in February 2021.
The urban inflation announced by the Central Agency for Public Mobilization and Statistics (CAPMAS) reached a monthly rate of 0.2% in February 2021. This compared to zero in the same month of the previous year and -0.4% in January 2021.
The annual headline inflation was 4.5% in February 2021, compared to 4.3% in January 2021.
Banking expert Mohamed Abdel-Aal said that the main factor affecting the direction of interest rates on the Egyptian pound is how the inflation rate will develop during the coming period. This is evident from the extrapolation of several other factors, such as the rate of economic growth, employment rate, and others.
He said that most of these factors indicate that the inflation will stabilise, at least until the end of Q1 of 2021, at less than the CBE's new target for inflation, which is 7% (±2%).
According to Abdel-Aal, the only factor that may affect the rate of inflation, and which must be carefully monitored, is the extent of the continuing global rise in oil prices. This would also require monitoring of this global rise's impact on prices locally, with the results expected to appear in early May 2021.
"We can say that the current interest rate remains consistent with prevailing or expected rate of inflation and current or expected economic and financial indicators," Abdel-Aal said, "This suggests the possibility of stabilising the interest rate in the next MPC meeting on Thursday."
Moreover, Beltone Financial said that it recorded annual headline inflation of 4.5% in February 2021, compared to 4.3% in January 2021.
These figures came in accordance with its previous expectations, and noted that inflation rose on a monthly basis by 0.2% in February, compared to a decrease of 0.4% in January.
Beltone said, in a research note, that the increase in the inflation on a monthly basis in February was the result of the stability of food commodity prices in February, compared to a decline of 1.6% in January.
It indicated that the developments in the level of inflation stimulate the reduction of interest rates. This comes in light of the stable headline inflation at a level lower than the target range by the CBE, which is 7% (±2%) on average by Q4 of 2022.
However, it is expected that interest rates will remain at the same figures during the MPC's meeting next Thursday. This comes in light of the stability of food commodity prices on a monthly basis after the decline it witnessed in the past two months.
This decline coincided with a noticeable increase in international commodity prices as well as the increase in oil prices.