Egypt’s bank reserve rise may be precursor of benchmark rate cut

Egypt has raised banks’ reserve requirements, tightening monetary policy in the sector in what economists said may permit and signal a cut to benchmark interest rates after three raises since November.

The Central Bank of Egypt raised the required reserve ratio on local currency deposits for domestic banks to 14 percent from 10 percent on Tuesday, citing “improved economic indicators” and bringing the ratio back to pre-2012 levels.

A larger reserve ratio tend to dampen banks’ lending, which would counter lower interest rates.

Egypt kept the ratio at 14 percent from 2001 until 2012 when it was reduced to improve liquidity for lending activity, for the public as well as the private sector, amid deteriorating economic conditions that followed a 2011 uprising.

Economists said the rise, effective on Oct. 10, could point to a coming benchmark interest rate cut or an effort to ease inflation which remains near record-highs despite a hike of 700 basis points since November last year.

“We attribute the timing to either an anticipated cut in interest rates that would affect liquidity, or a preemptive move in anticipation of a one-off inflationary shock,” said Alia Mamdouh, lead economist at Beltone Financial.

Inflation dipped in August after it had steadily climbed up since November following a CBE decision to float the pound currency to secure a three-year, $12 billion International Monetary Fund loan that includes tax hikes and subsidy cuts.

It had reached a record-high in July after Egypt hiked fuel prices by up to 50 percent and electricity prices by up to 42 percent in move to narrow its gaping budget deficit.

“We expect the CBE to signal the shift to an expansionary mode with an initial cut of 1-2 percent likely to materialize as early as December 2017, and after the base effect drives headline inflation downwards, in November,” said Hany Farahat, a senior economist at CI Capital.

Egypt’s Finance Minister Amr El-Garhy told Reuters last month fuel prices would not see another hike during this fiscal year that began in July. Fuel price increases are politically sensitive in Egypt with the government wary of social tensions caused by sudden price hikes.

But fuel subsidy reforms are one part of Egypt’s IMF programme, and some analysts say lower inflation could prompt the government to try to take advantage to increase fuel prices once again while it cuts back on subsidies.

Source: Reuters