Varied expectations about fate of interest rate in CBE's next Thursday meeting

Prices were fixed on 18 August 2022 at 11.25% for deposit, 12.25% for lending, 11.75% for credit, discount rate, and price of main operation

Expectations of analysts and investment banks varied about the upcoming meeting of the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) on the local interest rate next Thursday.
In its last meeting August 18, MPC decided to fix the basic interest rates at the CBE at 11.25% for depositing, 12.25% for lending, and 11.75% for the credit and discount rate and the CBE's main transaction, after increasing those prices by 3% during the previous meetings in March and May.
The committee stressed that this decision is in line with the goal to achieve stability in the medium term. Monetary policy tools are used to control inflation expectations and reduce inflationary pressures.
Given the initial effects of the supply shocks, it is expected that inflation rates will temporarily increase above the CBE's target inflation rate of 7% (±2%) on average during the fourth quarter of 2022, provided that inflation rates will gradually decline.
The committee stressed that it will continue to assess the impact of its decisions on inflation expectations and macroeconomic developments in the medium term, taking into account its decisions during its previous meetings to raise basic interest rates.
The committee also stressed that achieving low and stable inflation rates in the medium term is a prerequisite for achieving sustainable growth rates, pointing out that current interest rates depend mainly on expected inflation rates and not the prevailing rates.
The CBE has recently revealed that the basic consumer price index recorded a monthly rate of 0.6% in August 2022, compared to a negative rate of 0.3% in August 2021, and a rate of 1.5% in July 2022, and the annual rate of core inflation increased by 16.7% in August 2022, compared to 15.6% in July 2022.
Tarek Metwally, former Vice president of BLOM Bank Egypt, said that inflation is a phenomenon that all countries around the world, whether developed or developing, are suffering from, whether developed or emerging, and Egypt is not an exception. He pointed out that the increase in oil prices, main commodities and interest globally increases inflationary pressures locally, besides the continuation of inflationary pressures locally.
Metwally explained that there are great pressures on the state's resources in foreign currency, which leads to the decline of the Egyptian pound against the US dollar, which is one of the most important current and future factors affecting inflation, and this requires quick and strong measures to confront inflation.
According to Metwally, it is highly likely that the interest rate in the next meeting of MPC would increase. He pointed out that the rate of increase depends on the policy that CBE pursues during the coming period with regard to liberalizing the exchange rate.
Metwally believes that it is better to make a sudden decrease in the price of the Egyptian pound, in light of proper conditions, accompanied by an interest rate hike of 3% and a savings vessel for a specific period of no less than a year, at an attractive interest rate. This all aims to increase the attractiveness of the Egyptian pound for investment, and compensate those who will abandon the dollar, in addition to liberalizing import restrictions, especially with regard to production requirements and spare parts, as a first step until economic conditions stabilize.
He explained that the sudden devaluation of the pound and raising the interest rate would have a negative impact on the state's general budget, in addition to the rise in commodity prices, but its effects could be reduced by a package of social protection programs for low-income people, in exchange for the advantages of increasing competitiveness in tourism and export, creating job opportunities and attracting investments.
Metwally stressed that the state of uncertainty and high inflation across the globe, during the Russian-Ukrainian war, the global conflict and its economic repercussions, require quick and proactive measures to deal with the crisis, and solutions that require more courage and wisdom. He said that monetary and fiscal policy makers are going through a critical time as all of these global crises happen, which negatively affects everyone.
Moreover, Radwa El-Swaify, head of the research sector at Pharos Holding, believes that the CBE would fix interest rates during the MPC meeting next Thursday.
She stressed that this belief stems from the CBE's keenness on not adding pressure to the state's general budget with the relative calm in global commodity prices and the flow of inflation in a specific path. The decline will likely begin in early April 2023, and therefore, fixing interest rates comes with the aim of supporting production and the state budget.
In addition, El-Swaify said that raising the interest rate is not an excluded possibility, especially if quick steps are taken regarding the flexibility of exchange rates before the meeting date.
Likewise, Zilla Capital expected the CBE to fix interest rates during the MPC meeting next Thursday.
The company explained in a report it issued that the nature of the Egyptian economy and its trade balance make the effect of raising interest rates in calming inflation very limited. It pointed out that external variables regarding oil prices, as well as the food price index, may indicate that the worst in terms of import inflation has already passed, which may be a positive indicator.
It stressed that raising the interest rate would not attract foreign investors to the Egyptian pound, and would not support cash reserves, because the dollar bonds yielded different maturity dates at 15%, which would be an obstacle in the way of investing in Egyptian bonds with a return close to 12%.
Last Thursday, the CBE revealed the details of the inflation rate with its general and basic indicators in August 2022, and the developments in commodity prices during this month.
Moreover, the CBE said that in August 2022, annual headline urban inflation increased to 14.6% from 13.6% in July 2022. The annual inflation figure in August 2022 was mainly impacted by non-food inflation, and further supported by food inflation. This comes as monthly headline urban inflation recorded 0.9% in August 2022 compared to 0.1% in August 2021.
Monthly headline urban inflation in August 2022 reflected higher prices of non-food items across the board; a higher contribution of services, driven by higher prices of expenditure on restaurants and cafes, rents, inland transportation and private healthcare; a higher contribution of retail items, driven by higher prices of household cleaning products, clothing and footwear and personal care products; and a higher contribution of regulated items as tobacco prices increased for the second consecutive month. This increase reflects an increase in market prices of tobacco products which is different from the increase announced by Eastern Company on 4 September 2022.
Monthly headline inflation was further supported by food items, as the positive contribution of fresh vegetables was partially offset by the negative contribution of core food and fresh fruits.
On an annual basis, headline inflation during August 2022 was driven by the higher annual contribution of non-food items as annual non-food inflation continued to increase, for the tenth consecutive month, to record 10.8% in August 2022 from 9.9% in July 2022, which is its highest rate since May 2019.
In addition, annual food inflation increased to 23.1% in August from 22.4% in July 2022.
Driven by broad-based higher annual contributions, annual core inflation continued to increase for the past twelve months, to record 16.7% in August from 15.6% in July 2022, the highest rate since December 2017. This comes as monthly core inflation recorded 0.6% in August 2022, compared to negative 0.3% in August 2021.
Nationwide annual inflation and annual rural inflation increased to 15.3% and 16.0% in August 2022, from 14.6% and 15.6% in July 2022, respectively.
Prices of fresh vegetables increased by 15.0%, while prices of fresh fruits declined by 4.7%. Together, they contributed by 0.30% to monthly headline inflation. The positive inflation of fresh vegetables, while stronger than the average recorded in August historically, is considered broadly normal given that it comes after three consecutive months of declines against seasonal patterns.
Prices of market rice, dairy products, red meat, pasta, fats increased by 8.3%, 2.3%, 0.5%, 2.7%, and 2% respectively, and they contributed 0.11%, 0.08%, 0.02%, 0.02%, and 0.02% respectively to monthly headline inflation.
Prices of poultry and eggs declined by 9.7% and 1.7% respectively, and contributed -0.43% and -0.02% respectively to monthly headline inflation.
Prices of other core food items including market sugar, bread, pulses, tea, among others, also increased to contribute 0.11% to monthly headline inflation.
Prices of services increased by 1.0% and contributed 0.32% to monthly headline inflation.
This was mainly due to higher prices of expenditures on restaurants and cafes, rental values, outpatient services, private hospitals, inland transportation and pilgrimage, among other things.
Prices of retail items increased by 1.4% and contributed 0.19% to monthly headline inflation.
This was mainly due to the increase in the prices of household cleaning products, clothing, purchase of vehicles, personal care products, among others.
Prices of regulated items increased by 0.7% and contributed 0.16% to monthly headline inflation. This was mainly due to the increase in tobacco prices.
Monthly core inflation was affected by price changes of the aforementioned core CPI items. Services contributed by 0.45% to monthly core inflation. In addition, retail items contributed by 0.26% to monthly core inflation.
Meanwhile, core food items contributed by negative 0.12% to monthly core inflation.