For the second time in less than two months, the Central Bank of Egypt raised key interest rates, thus continuing its “tight monetary” policy to curb the rising inflation, in a move that raises some citizens’ questions about the repercussions of the decision on their monthly expenses, and how it might be affected.
The Central Bank of Egypt said in StatementOn Thursday, he raised key interest rates by 200 basis points, at the Monetary Policy Committee meeting.
The committee raised the overnight lending rate to 12.25 percent from 10.25 percent, and increased the overnight deposit rate to 11.25 percent instead of 9.25 percent.
But why was the decision taken at this time?
Curb “inflation”
That question should be answered by the economic expert and advisor to the Minister of Supply and Trade in Egypt, Medhat Nafeh, who said that “the Central Bank of Egypt sought to contain the high inflation rates with the fastest monetary tightening policy tool, which is raising the interest rate.”
He added, in statements to Al-Hurra website, that the expected inflation rate was 7%, a rate that may decrease or increase by 2%, and therefore, expectations were from 5 to 9%, but inflation rates exceeded 14%, at the end of April the past.
According to the dataCentral Agency for Public Mobilization and StatisticsThe “inflation rate” reached 129 points for the month of April, registering an increase of 3.7% over the month of March, and the annual inflation rate recorded 14.9% in April, compared to 4.4% for the same month of the previous year.
Nafeh explained, that raising the interest rate results in the absorption of excess liquidity, at a time when some see that the main cause of inflation is a shock in supply and production costs.
He added, “I think that the basis for inflation is imported from Europe and America, and the reason is mainly import.”
He pointed out that the biggest beneficiary of the decision is the flow of foreign funds, which the Central Bank seeks to preserve in the short term in particular, because without it, imports will stop and the “complete movement of the economy” will stop.
The economist considered that maintaining foreign flows from exiting or attracting more of them requires that you have positive or even negative real interest rates as is currently the case, but it is “relatively better than other alternatives for the foreign investor.”
He continued, “Raising the interest rate means a relatively stronger pound, or at least it can withstand foreign currency fluctuations, which means more foreign exchange flows or stopping its exit bleeding at least as much as possible.”
Stop the bleeding of hot money
On May 15, the Egyptian Prime Minister, Mostafa Madbouly, revealed that $20 billion in hot money had flown out of the country.
Therefore, the economic expert and advisor to the Arab Center for Studies in Cairo, Abu Bakr Al-Deeb, believes that “the decision was expected and came at an important time, to prevent more hot money from leaving the Egyptian market, and to work to control monetary policies by reducing the monetary mass within the markets.”
In statements to Al-Hurra website, Al-Deeb indicated that the goal of the decision is to control consumption rates in light of the high prices, due to the situation of the global economy, the regression in supply chains and the damage to the transportation of food and energy commodities, after the outbreak of war in Ukraine.
He continued, “The decision aims to try to control the rise in prices by reducing the demands of individuals and companies for goods and services, because raising the cost of borrowing reduces the demand for borrowing from banks.”
And he added: “Increasing the interest rate on farewell makes individuals prefer saving in banks over consumption.”
He considered that the decision is consistent with “international monetary policies”, in light of the tendency of most global central banks to adopt a strict monetary policy, by raising interest rates in light of the rapid and large wave of inflation that the world has not witnessed for decades.
What about the citizen?
On March 21, the Central Bank of Egypt decided to raise interest rates by 100 basis points on deposit and lending, to reach 9.25 and 10.25 percent, respectively.
In the wake of the Central Bank’s move, Al-Ahly and Egypt Banks launched savings certificates with a return of up to 18 percent annually, with the aim of withdrawing liquidity from the markets. These certificates collected more than 600 billion pounds.
Therefore, the economic expert, Muhammad Anis, confirms that the citizen who saved in these certificates will not feel the repercussions of the Central Bank’s decision, pointing to the direct and indirect impact of the decision on the “simple citizen.”
In statements to Al-Hurra, he said, if the citizen has some savings, he has benefited during the past month and a half, after depositing that money in an 18 percent return certificate, which offers an interest rate higher than the current inflation rate.
He added, “Raising interest will not affect citizens’ savings in banks, but raising interest at a large rate of 2% will fight the high inflation rate.”
Anis expected a decrease in the inflation rate in the coming months, and thus control the markets.
Medhat Nafeh agreed with him, saying: “The Central Bank pre-empted the decision to raise the interest rate by offering certificates with a return of 18 percent, considering that the Central Bank of Egypt understood the nature of the market well.”
He continued, “In the short term, the production structure will not change, as you are hostage to the existing structures, which depend on foreign flows of hot money in order to finance the demand and savings gap.”
3 main risks
Agreed with the two previous opinions, Abu Bakr al-Deeb, who said that “anyone who has a bank account or deposits in banks, is a beneficiary of increased profits, whether monthly, quarterly or annually.”
But at the same time, he talked about 3 main risks to the central bank’s decision, which are declining growth rates, damage to the stock market and investment, and an increase in recession rates.
He explained that the liquidity will diminish to go to the banks due to the high interest rate.
Al-Deeb added that the investment and industry sectors will be affected as a result of the decision, which will reduce economic, industrial and investment activity, and put pressure on borrowers or those seeking to borrow.
He added, “Increasing interest rates is beneficial for deposit holders, but it causes an increase in government debt interests and a budget deficit.”
And he added, “The world now has a great priority, which is fighting the nightmare of inflation, and Egypt is in this vein, even if this is at the expense of reducing economic growth.”