The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will hold its eighth and final periodic meeting in 2021 to discuss the fate of the base interest rates, which are the main indicator of the direction of the Egyptian pound's interest in the local market in the short term. The committee decided, during its 28 October meeting, to keep the base interest rates unchanged for the eighth time in a row, at 8.25% for deposit, 9.25% for lending, and 8.75% for the credit and discount rates and the main operation. The MPC said those rates were appropriate at the time, and consistent with the inflation target of 7% (±2%) on average during the fourth quarter (4Q) of 2022. Mohamed Abdel Aal, a banking expert, said that despite the current global inflationary wave, the Central Agency for Public Mobilization and Statistics announced a decline in Egypt's annual inflation in November for the second month in a row, after consecutive increases over five months. Annual Inflation fell to 6.2% compared to 7.3% in October, and most importantly, the monthly rate declined to zero, compared to 1.7% in the previous month. He added: "The core inflation in November – computed by the CBE – which does not include the values of highly volatile or seasonal items, recorded 5.8% up from 5.2% in the previous month. Both rates, even with the decline of the first and the rise of the second, are still below the CBE's target until 4Q 2022." He pointed out that there were many factors that led to our inflation rate not being affected sharply by imported inflation, and that the transmission of the imported inflationary wave needs a period that the import and shipping cycle requires not less than three months on average, and from here it can be said that the expected effect from imported inflation on the Egyptian inflation rate will be modest, and we expect the inflation rate to continue until the end of the year as a single digit below the target rate from the Central Bank. According to Abdel Aal, if those expectations are correct, thinking about the possibility of raising interest rates may be unjustified, and that the predominant trend will be to fix interest. He added that one of the reasons that may justify fixing the interest also is to hedge against potential risks of generating stagnation in some economic sectors, pointing out that many fear the expected repercussions of the new variant, Omicron. Raising interest rates may not be practical at the present time, especially as the CBE continues to support the household sector by providing savings vessels to increase this segment's income and increase consumption. Abdel Aal pointed out that the fear of the impact of the United States and the European Union raising interest rates on the flow of foreign indirect investment in government public debt securities is a matter that is postponed to the beginning of next year, as those countries, along with China, preferred not to raise interest rates this year for fear of the repercussions of the Omicron at a time when we have stable economic indicators, the most important of which are the stability of the exchange rate, the decline in the annual general inflation rate, and the continuous growth of the monetary reserve. Moreover, Tarek Metwally, a banking expert, expected that the MPC would stabilize its interest rates at Thursday's meeting. He stressed that despite the increase in the annual rate of core inflation to 5.8% in November 2021, compared to 5.2% in October 2021, it is still within the target range set by the CBE of 7% (±2%) on average during 4Q 2022. He indicated that the US Federal Reserve will not increase interest rates before the first quarter of 2022, and it will be by a quarter of a percentage point in each meeting over 4 times, to reach 1%, and therefore the Central Bank of Egypt will not move unless it finds that the high return on the dollar may threaten investments in debt instruments in the Egyptian government. Radwa El-Swaify, head of research at Al-Ahly Pharos Securities, expected that the CBE will keep interest rates unchanged. El-Swaify attributed this to the fact that inflation rates are still within the targeted limits, and that real interest rates are still attractive, and that there is no reason to raise interest rates at the present time because it will come at a cost to the Egyptian economy. The Research Department of Beltone Financial also expected the CBE to keep interest rates during the next MPC meeting, which will be held on 16 December 2021. Beltone attributed this to the need to maintain investment attractiveness in the fixed income market, especially with the rise in interest rates globally, which puts pressure on flows to emerging markets. The Research Department of HC Securities and Investment expected that the Central Bank of Egypt would keep the interest rate unchanged at its meeting on Thursday. Monet Doss, Senior Analyst for Macroeconomics and the Financial Services Sector at HC Securities, said that the level of inflation in Egypt will remain within the target range set by the CBE of 7% (±2%) on average during 4Q 2022, and it is expected to reach 5.8% in 1Q 2021. Doss expected a decrease in inflationary pressures locally in the future, with the decline in global oil prices, pointing out at the same time that, according to Bloomberg's expectations, the average inflation in the United States will stabilize at 2.9% in 2022/23, and thus the real return will be negative 2%, which is much lower than the real interest for Egypt at 3.3%. It considers that Turkey's real returns are less attractive than Egypt's, as it comes at 0.9%, with a 14.2% return on 12-month Treasury bonds and 0% taxes, and Bloomberg's forecast for Turkish inflation at 13.3% for 2022. The Prime Investment Bank expected the CBE to maintain the current situation in interest levels during the bank's meeting on Thursday. The investment bank attributed this to the fact that the inflation rate is still within the target while global conditions are still confusing inflation expectations, due to the increase invested in core inflation, and the spread of inflationary pressures outside the volatile banks. It expected the CBE to focus on reviving the economy by maintaining its current accommodative monetary policy until the picture becomes clear regarding the expectations of global inflation drivers and their impact on the country.
