09:14 PM
Thursday, September 22, 2022
Books – Mustafa Eid:
The Central Bank of Egypt raised the mandatory cash reserve ratio of deposits on banks to 18% instead of 14%, which accompanied its decision to fix interest rates for the third time in a row during the Monetary Policy Committee meeting today, Thursday, at 11.25% for deposit and 12.25% for lending.
This increase in the mandatory reserve is the first of its kind since October 10, 2017, when the Central Bank raised it from 10% to 14% as of October 10.
The Central Bank had reduced the required reserve by 4% in 2012, to enable banks to meet the increased demand for liquidity after the January 25 revolution.
In the following lines, Masrawy tries to define the meaning of the mandatory reserve and the impact of the decision on inflation rates and the performance of banks, and is this decision positive or not?
What is the mandatory reserve on bank deposits?
The mandatory reserve is a percentage of the total customers’ deposits with banks, whether in local or foreign currencies, which the Central Bank forces banks to deposit without receiving a return for the deposit.
What is the purpose of imposing a mandatory reserve on bank deposits?
Its purpose is to hold it, in order to ensure that the bank that deposits the reserve will not be exposed to any risks in the event of a mass withdrawal of their deposits from customers.
The mandatory reserve is also used as one of the monetary policy tools of the Central Bank to intervene in the market by withdrawing or increasing liquidity, which contributes to influencing inflation rates, especially in terms of factors related to demand, as the higher the liquidity, the higher the demand for purchasing goods, and then the higher the inflation rates, and vice versa.
– How does the Central Bank’s decision affect the current inflation rates?
The Central Bank said in its statement today that raising the required reserve ratio will help in restricting the monetary policy pursued by the Central Bank.
Raising the mandatory reserve contributes to the central bank achieving its goal of controlling high inflation in recent months, as an alternative to a new interest rate hike, especially since the central bank sees that the first hike in March and May with a total of 3% is still moving to the markets, and therefore it is difficult to take a decision on a new hike. .
In addition, raising the reserve avoids the central bank resorting to raising interest and thus supporting the economy, especially in light of the repercussions of global economic conditions on the private sector and economic activity, in addition to saving the public treasury an additional cost of domestic borrowing in order to bridge the financing gap and thus not expand the deficit.
Mona Badir, an economist, told Masrawy that the central bank’s decisions today reflect that the new bank’s administration is more conservative with regard to resorting to the traditional tool of monetary tightening, which is raising the interest rate, which has the fastest effect in relation to inflation.
She added that the new central bank administration is inclined to support the economy as much as possible, with this decision, especially that raising interest rates will throw a new weight on the sectors of the real economy.
She pointed out that this comes at a time when these sectors are already suffering from the difficulty of their ability to reach the high prices of international commodities, which affect the cost of production, in addition to the difficulty of their ability to secure these materials in the first place, especially in light of the dollar shortage crisis and the documentary credits crisis.
The annual general urban inflation rate rose to 14.6% in August 2022 from a rate of 13.6% in July, according to the Central Bank statement today.
The annual rate of core inflation – which is calculated by excluding the group of fresh vegetables and fruits as well as goods and services whose prices are fixed by administration – was 16.7% last August from 15.6% in July.
The Central Bank had aimed to record the annual inflation rate of 7% during the fourth quarter of 2022, with an increase or decrease of 2% from this rate.
However, he said in his statement today that it is expected, on a temporary basis, that inflation rates will rise above its target.
– What is the impact of the Central Bank’s decision to raise the mandatory reserve on banks?
There are 4% of deposits, after they were employed in the purchase of treasury bills and other credit instruments, were transferred to the Central Bank without a return, which will put pressure on banks’ revenues, according to what Radwa Al-Swaify, head of research at Al-Ahly Pharos Company, told Masrawy.
Al-Suwaifi believes that the banks may request a higher return on the treasury bills offered by the government and in which the banks invest in the short term to mitigate the impact of the decision until interest rates are reduced by the Central Bank.
Is raising the mandatory reserve necessarily linked to controlling inflation?
Raising the mandatory reserve is not only linked to inflation, but its main goal is for the banking sector to be in a good condition, meaning that there is no excess liquidity that banks will pay to lend without a good verification of the borrower and his ability to pay, according to what Noman Khaled, an analyst at Arqaam Capital Investment Bank told Masrawy at a time. former.
Are there other advantages to the decision?
The decision may raise the cost of treasury bills to the state during the coming period with the decline in liquidity in banks, but at the same time it may lead to attracting some foreign investments in these instruments after they declined sharply in the past months due to the repercussions of the global economic conditions with the outbreak of the Ukraine war and raising prices American interest.