Economists Divided On CBE’s Next Interest Rate Decision

Economists in Egypt are divided over the direction the Central Bank of Egypt (CBE) will move its key policy interest rate in its next meeting on Thursday 29 October.

Out of five economists talked to by Ahram Online, two believe the CBE will keep its monetary policy unchanged, the third expects a raise in interest rates, the fourth thinks it is difficult to predict and the fifth predicts an interest rate cut.

The CBE’S Monetary Policy Committee (MPC) convenes every six weeks to set its overnight deposit and lending interest rates, currently held at 8.75 percent and 9.75 percent, respectively. For five consecutive meetings, the MPC has refrained from changing these rates.

Thursday’s meeting is the last one in the tenure of CBE governor Hisham Ramez, who is to be replaced by deputy governor Tarek Amer when his term ends on 26 November.

The CBE will leave its interest rates unchanged on Thursday, Ziad Waleed, economist at Cairo-based Beltone Financial, told Ahram Online in a telephone interview.

The headline inflation rate has risen to 9.2 percent in September from 7.9 percent in August. Core inflation remained unchanged in September at 5.55 percent.

According to its mandate, the CBE is committed to achieving low inflation rates in the medium term that are reasonable for sustaining high investment and economic growth (inflation targeting).

The Central Bank is more likely to wait till year-end before raising interest rates as the Federal Reserve is expected to have its first interest rate hike since 2008, said Waleed, citing exchange rate pressure.

“In this case, pressure on the pound will be greater, justifying a rise in interest rates, whereas any rise before the Fed’s move may prove ineffective, especially since interest rates in Egypt are already high,” said Waleed.

Eman Negm, an economist at Prime Holding, also expects interest rates to stay on hold as core inflation remained unchanged in September, making a rate hike unlikely.

“Core inflation was largely unchanged in September, whereas headline inflation rose mainly due to an increase in the prices of vegetables and other foods,” she told Ahram Online in a telephone interview.

The CBE should raise interest rates in the face of the current dollarisation, says Sherine El-Shawarby, an economics professor at Cairo University.

“The Central Bank can raise the deposit rate more than the lending rate to reduce the pressure on the Egyptian pound, which will not hurt investment and economic growth,” she said.

Hany Geneina, chief economist at Cairo-based Pharos Holding, said it is difficult to predict what the Central Bank will do in its next meeting “due to lack of information on Egypt’s FX policy under the new governor in terms of the timing, scope and magnitude of the next steps in fiscal consolidation and the outlook for international commodity prices.”

While the effectiveness of a raise of 50-100 basis points is questionable, says Geneina, given that the CBE has already drained the market from sizable excess EGP liquidity, a hike exceeding 100 basis points might trigger “an acute liquidity shortage.”

Others expect the CBE to cut rates to stimulate economic activity at a time of reasonable inflation.

A 50 basis-point cut in interest rates is expected, since economic activity “remains sluggish” and “inflation remains in the single digits,” said William Jackson, economist at Capital Economics, in an emailed note.

Source: Ahram Online