Following the decision by Egypt’s Central Bank to keep the main overnight deposit, lending and discount rates at 9.75%, 10.75% and 10.25%, financial experts predict inflation rates to further increase.
Financial expert Alaa Mostafa said that interest rates are generally linked to inflation rates; however, in Egypt, the situation is much more complicated.
Mostafa cited the consistent inflation increases over the past few months. In May, annual inflation reached 8.2% compared to 8.1% in April, the Central Agency for Public Mobilization and Statistics (CAPMAS) reported. This was the first decline recorded since the beginning of the year.
Despite the inflation increase, the Central Bank’s Monetary Policy Committee (MPC) said it was reluctant to raise rates, fearing any political decisions or risks would affect the economy.
The last time the bank increased rates was back in March, when it raised them by 50 basis points. The bank however stated that the decision was taken in light of the lack of strong economic growth.
“Given the mixed balance of risks surrounding the inflation and GDP outlooks at this juncture, the MPC judges that the current key Central Bank rates are appropriate,” the bank said in a statement citing the slowdown in economic growth.
Executive Manager of Equity Funds at the National Fund Management Company, Karim Abdel Aziz, said that any attempts to amend the current interest rates are related to collecting excess liquidity or borrowing, or keeping to the Central Bank’s policy of controlling inflation.
“The Central Bank is currently facing many challenges, such as the widening budget deficit, exchange rate increases, and the general recession in the country,” he said. “Dealing with a recession is not included in the bank’s monetary policy.”
Mostafa, on the other hand, believes that the current interest rates set by the bank do not represent the inflation rate in Egypt.
“As we move further into the summer season, prices are very likely to go up, and thus inflation will increase much more,” he said.
Mostafa added that “very low foreign currency reserves, low tourism revenues and low exports, are all factors that significantly and directly affect the interest rates.”
Since the 25 January Revolution, Egypt has been struggling with its lack of foreign currency reserves. Net foreign reserves stood at $16.04bn in May after Egypt received $3bn from Qatar, compared to $36bn on the eve of the revolution.
In addition, the tourism sector, which prior to the revolution had represented 11% of the country’s GDP, has been severely affected as well resulting in low revenues.
Economic expert Sherif El-Khereiby said that all these economic factors have been “on the low since 2011, and are unlikely to pick up again if political stability isn’t achieved.”
The MPC has also acknowledged the impact political instability has had on the economic environment, specifically investment, saying that “the current political transformations may continue to have ramifications on both consumption as well as investment decisions, adversely weighing on key sectors within the economy”.
El-Khereiby also warned that political instability may push the Egyptian pound to further depreciate in value, which would lead to higher inflation rates.
“The Egyptian pound has lost 11% of its value since last year, and this has resulted in higher costs of imported goods, and has contributed to inflation as well,” he said.
“While the slowdown in economic growth has been limiting upside risks to the inflation outlook, there are possible upward pressures on inflation going forward,” the MPC said.
The Central Bank’s decision to keep rates unchanged comes a week ahead of rallies planned for 30 June by Egyptians protesting against President Mohamed Morsi.
As a precaution, the bank has instructed all Egyptian banks this week to come up with an emergency plan to maintain enough cash balances to cover deposits and withdrawals for at least five days.
“The MPC will continue to closely monitor all economic developments and will not hesitate to adjust the key Central Bank rates to ensure price stability over the medium-term,” Monetary Policy Sub Governor Rania Al-Mashat said.