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Package of negative implications pending after hiking interest rate - Daily News Egypt

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Package of negative implications pending after hiking interest rate

Financing of companies through non-bank financial markets amongst top beneficiaries


The decision of the Central Bank of Egypt (CBE) to raise interest rates by 2% on Thursday stirred outcry in various economic sectors amid a consensus on the negative decision on the expansion of companies and plans to increase production, as it will increase the cost of bank financing to companies significantly, which may freeze their expansion plans.

Experts predict that the rise in interest rates will also have negative effects on the domestic borrowing cost of the government, where it will lead to increased internal debt burdens as a result of borrowing from domestic banks.

In general, the new interest rates will cause the banks to suffer the same losses in terms of the size of their credit portfolios, which are expected to fall significantly. The stock market may be one of the main beneficiaries of raising interest rates. It will become the least expensive means of financing by increasing the capital of companies or offering new propositions.

Experts also ruled out that the interest hike could be a solution to curb inflation, especially as the current inflation waves in the country are not due to the high purchasing power of citizens, but rather the result of the depreciation of the local currency against the dollar, which raised production costs. Hence, the CBE will not work on attracting surplus liquidity and savings into saving vessels to reduce cash among citizens and ease demand on services and goods, something the CBE has stressed.

Radwa El-Swaify, head of research at Pharos Holding, said that hiking interest rates is not in line with the prevailing economic situation in the country. She explained that the reason for inflation is not because demand is higher than supply, but because of the high cost to manufacturers, which is passed on to consumers.

She pointed out that raising the interest rate will not yield positive results at the present time, but that it will have a negative effect, including the decline in foreign investments in treasury bills and bonds because the increase in interest means, in their view, a similar increase in risk.

She explained that the solution lies in maintaining current interest rates and not resorting to lifting them from their current limits, as the current interest is very appropriate and does not need any move.

On 6 July 2017, the CBE’s Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, the overnight lending rate, and the rate of the CBE’s main operation by 200 basis points (2%) to 18.75%, 19.75%, and 19.25% respectively. The discount rate was also raised by 200 basis points to 19.25%.

The CBE stated that the decision aims to mitigate the side effects caused by high prices of fuel and electricity, as well as the rise in the value-added tax (VAT).

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