To contain inflation… Expectations to raise interest rates at the Central Bank

05:32 PM

Tuesday 10 May 2022

Books – Mustafa Eid:

Analysts expected the Central Bank of Egypt to raise interest rates by between 0.5 and 2% during the next meeting of the Monetary Policy Committee on Thursday, May 19th.

This comes after inflation rates continued their upward journey last April for the fifth month in a row, amid expectations of a further rise in the coming months, amid the repercussions of the global monetary tightening and the recent increase in US interest rates by 0.5%, which is expected to negatively affect foreign indirect investment flows to emerging markets.

The next meeting comes after the Central Bank of Egypt suddenly raised interest rates by 1% in an exceptional meeting on Monday, March 21, to reach 9.25% for deposit and 10.25% for lending, the same day that the National Bank of Egypt and Egypt began offering a high savings certificate. Return of 18%.

This coincided with what Tariq Amer, Governor of the Central Bank of Egypt, described as a correction move, when the price of the pound witnessed a noticeable decline against foreign currencies, as the price of the dollar rose by 17.7% during the days of March 21 and 22.

Prior to the extraordinary meeting, the Central Bank’s Monetary Policy Committee fixed the bank’s interest rates during its 10 meetings (8 of which were held in 2021), the last of which was the committee’s first meeting in 2022 on the third of last February.

Radwa Al-Swaify, head of the research department at Al-Ahly Pharos Securities Brokerage Company, expects the Central Bank to raise interest rates by 2% during the next meeting of the Monetary Policy Committee.

Hani Genena, an economist and lecturer at the American University, agreed with Radwa to expect the Central Bank to raise interest rates by 2% on Thursday after next.

Radwa El-Swaify told Masrawy that the expected hike in interest rates will be in order to contain inflation trends, and take into account interest rate trends within emerging markets, in light of monetary tightening trends at the global level.

She added that this comes after “the higher than expected inflation reading in April, and the expected gradual increase in the inflation reading over the next few months, as we expect the number to reach its peak of 14-15% in August 2022, after which it will begin to decline and return to the target area by April 2023”.

The annual inflation rate for the total of the Republic continued to rise for the fifth consecutive month during last April, recording 14.9 percent, compared to 12.1 percent in March, according to what the Central Agency for Public Mobilization and Statistics announced in a statement today, Tuesday.

The annual inflation rate in cities rose to 13.1% in April, compared to 10.5% in March.

The annual inflation rate in cities exceeds the target range set by the Central Bank for the annual inflation rate at the level of 7% (+ or 2%) on average during the fourth quarter of 2022.

The monthly inflation rate for the total of the Republic recorded 3.7% in April, compared to 2.4% last March.

The monthly inflation rate in cities reached 3.3%, compared to 2.2% in March, and in the countryside, it reached 4.2%, compared to 2.7% in March.

On Wednesday, the US Federal Reserve approved raising the federal funds rate by half a percentage point, to 1%, the largest increase since 2000, in line with the expectations of most investors.

The move by the Federal Reserve comes with the aim of curbing inflation, which reached its highest level in 40 years at 8.5%.

Hani Geneina told Masrawy that this expected increase in interest rates at the next meeting of the Central Bank aims to anticipate the expected rise in inflation rates, to maintain the attractiveness of local assets and to support the ability of public banks issuing the 18% certificate to continue offering them until external financing is available from the International Monetary Fund And from other sources.

In a research note on Tuesday, Naim Securities Brokerage Company expected the Central Bank of Egypt to raise interest rates by another 100 basis points at the next meeting of the Monetary Policy Committee.

This comes “with real interest rates turning negative, and inflation likely to remain elevated in the near term,” the company said.

She added that with the latest inflation reading, the real yields in Egypt (after taxes) turned negative for both treasury bills and treasury bonds in the local currency. However, for new deposit holders of 18% savings certificates, the real rate of return stands at 4.9% (likely the highest in the world).

Alia Mamdouh, chief economist at Beltone Investment Bank, expected the central bank to raise interest rates between 0.5 and 1% during the next meeting of the Monetary Policy Committee.

She attributed this to the continued rise in domestic inflation, in addition to the pressures of raising the US interest rate recently by 0.5%.

Muhammad Abu Basha, deputy head of the research department at Hermes Investment Bank, agreed with Alia Mamdouh, telling Masrawy that it is expected to raise interest rates between 50 and 100 basis points due to the high inflation rates (and the expectation to continue rising in the coming months), in addition to an acceleration of the rate of increase Interest rates from the US Federal Reserve.



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