The Central Bank of Egypt (CBE) kept its overnight interest rates unchanged last week for the second time in a row. The move was "no surprise" to many analysts, citing falling core inflation rates. But other economists and bankers argued that it was necessary to increase interest rates to "compensate" for a declining purchasing power of the Egyptian pound. Egypt's core inflation, computed by the CBE, slowed to 6.9 per cent in February, compared to 7.39 per cent the previous month. The core inflation index excludes fruit, vegetables and energy from the consumer price index (CPI) calculated by the State-run Central Agency for Public Mobilisation and Statistics (CAPMAS). Some analysts believe that the CBE should take the CPI into consideration in setting up its monetary policies. Inflation in the most populous Arab country of 80 million stood at 12.8 per cent in February, against 13.6 per cent a month earlier, according to CAPMAS. Therefore, some economists argued there was a need to raise rates to counter inflationary pressures. The move has raised the question: When will the CBE hike up its rates? "The CBE won't raise interest rates unless the global economy is back on its feet again. When recovery is sure other central banks, particularly the European Central Bank and the US Federal Reserve, will hike up rates. We're all in the same boat," Osama Farid, a professor of economics at Ain Shams University in Cairo, told the Egyptian Mail in an interview. The International Monetary Fund (IMF) said this month that the global economy was set to rebound sharply this year, with 3.9 per cent growth. Dominique Strauss-Kahn, the Managing Director of the IMF, said this month the global recovery was ‘shaping up to be better than expected'. But the growth rates are poised to ‘vary significantly' across the globe, according to him. Growth in advanced countries is expected to average only 2.1 per cent this year and 2.4 per cent in 2011, according to the IMF. The fund raised its estimate of global growth by 0.8 percentage points, to 3.9 per cent for this year, and predicts 2011 global growth will hit 4.3 per cent. "When the ECB and the Federal Reserve raise rates, the CBE will take the same move. I think the CBE will raise rates by the third quarter. Stable economic growth will consequently lead to an increase in interest rates," Farid said. Egypt's growth accelerated to 5.1 per cent in the second quarter of the fiscal year 2009/10 (October-December) from 4.9 per cent in the first quarter, according to the Ministry of Finance. Growth contracted to less than five per cent in 2009 after an average seven per cent growth in the previous three years. In the wake of double-digit inflation rates, people tend to look for higher yields. Economic growth leads to a recovery in risk appetite, encouraging investors to buy more higher-yielding assets such as commodities, currencies and stocks, analysts say. However, the golden rule in this country is to play it safe! "High inflation rates drive people to invest in properties and gold. Usually that affects bank deposits negatively. Properties remain the safest haven from inflation in Egypt," he said. The CBE slashed interest rates six times in 2009 to push the economic wheel ahead. Overnight deposit and lending rates stand at 8.25 and 9.75 per cent respectively. Bankers believe that lower-than-usual interest rates will take its toll on deposits when growth is back on track. Deposits with local banks shrank by 0.14 per cent month-on-month to LE857.9 billion ($157 billion) in January, according to the CBE. Meanwhile, loans rose by 0.66 per cent month-on-month in January to LE433.3 billion. "Low interest rates have fuelled competition among banks to attract more deposits. Local banks have raised rates on depositary receipts to around ten per cent," Hossam Fawzy, an accountant with Banque du Caire, told this newspaper. Businesspeople may withdraw their money from banks to invest it by themselves. But what about small savers, who are mainly pensioners, that don't have another alternative? "Small savers feel the pinch due to falling interest rate on the Egyptian pound. Given high inflation rates, things get more complicated as those people live on interest yields from their bank deposits," Fawzy explained. "But commercial banks have many investment solutions that suit people from walks of life. Small savers may switch to investment funds at local banks, which are professionally run and offer higher yields," he added.
