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How will the capital market respond to the CBE's decision to raise interest rates? The global interest rate hike caused a shock in the financial markets
The Central Bank of Egypt (CBE) decided to raise its interest rates by 200 basis points in its meeting last Thursday in response to the rising levels of inflation, coinciding with the global trend by the US Federal Reserve to raise interest rates. Despite the decision to raise interest rates within the framework of a monetary tightening policy, the Egyptian Exchange (EGX) concluded trading last Thursday on a high note, as the main index, the EGX30, closed 0.79% up at 10,545 points, while the EGX70 EWI index declined by 0.64% to close at 1,832.7 points. Mohamed Farid — Head of the EGX — said that raising the interest rate globally caused a shock in the financial markets as a result of the negative consequences of the increase in interest on the decline in the value of shares offered in stock exchanges. Previously, Farid explained that central banks resort to raising interest rates to enable them to manage the volume of liquidity, control inflationary pressures, and motivate customers to invest in the EGP through certificates and treasury bills, however, it negatively affects the decline in the value of shares like other assets. He stressed that despite the recent developments, the stock market remains the most hedging tool against price-increasing turmoil in the short and medium term. Amr Al-Alfi — Head of the Research Sector at Prime Securities Brokerage — expected that the stock market's trading will be positively affected due to the positive impact of the decision on the Commercial International Bank's (CIB) share, which has the largest relative weight in the main index of the EGX. The CIB's share increased by 3% during last Thursday's trading session to EGP 41.7 per share. Al-Alfi added that a hike in interest rates is expected in any case, pointing out that banks will benefit directly, while companies with high borrowing will be affected. He added that the industrial sector will be negatively affected by the decision to raise interests, however, it is possible that the CBE will launch initiatives dedicated to supporting the sector and encouraging investment. Mostafa Shafei — Head of Research at Arabia Online Securities — said that the decision to raise interest rates by 200 basis points by the CBE will negatively affect the industrial sectors, especially those with high leverage. Shafei added that among the most prominent listed industrial companies negatively affected by the decision are Ezz Steel, Qalaa for Financial Investments, and Elsewedy Electric due to their bearing an additional burden of the high cost of debt. He pointed out that the monetary tightening policy leads to a slowdown in the pace of investments and reduces the appetite of investors to inject new investments due to the high cost of borrowing. Furthermore, he said that the non-bank financial sector is one of the main beneficiaries of raising interest rates, and that inflation waves are driving an increase in demand for instalment operations, explaining that lenders in general — such as the banking sector — are beneficiaries, but it is necessary to know the impact of offering 18% savings certificates on the rest of the banks to determine the extent. Hany Genena — an economist — believes that the decision to raise interest rates by 2% was expected over the past few days and that it would not affect the EGX negatively, and if the next Sunday session witnessed a decline, it would be due to the impact of the decline of the American stock exchange and European stock exchanges. He pointed out that the decision has a positive impact on the EGX and is a good step to reassure Egyptian, Arab, and foreign investors to return to the stock and bond markets again. Additionally, he pointed out that the impact of raising interest rates on the industrial sector is not catastrophic, especially since many companies do not have large debts, in addition to owning many assets, explaining that companies that have debts to banks will be able to pass the increase in interest to the consumer. Geneina also said that the industrial sector is more concerned with the stability of the exchange rate than the interest rate hike, and any decision taken by the central bank to maintain the exchange rate is positive for the sector.
