Raising the reserve ratio portends a rate cut
The central bank’s move to raise reserve requirements to 14% from 10% signals “that we will see an interest rate cut soon … The central bank is trying to control liquidity using tools other than interest rates,” Radwa Elswaify, head of research at Pharos Holding told Bloomberg. The move brings the ratio back to its 2001-12 levels, before it was gradually lowered to help lenders meet liquidity requirements. Elswaify says “banks are likely to respond by lowering rates offered on customer deposits and by asking for higher yields on government treasuries, raising the cost of borrowing for the government.”
Other economists appear to agree. “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 Beltone Financial’s Alia Mamdouh tells Reuters. “We expect the CBE to signal the shift to an expansionary mode with an initial cut of 1-2% likely to materialize as early as December 2017, and after the base effect drives headline inflation downwards, in November,” said CI Capital’s Hany Farahat. Arqaam Capital senior economist Reham Eldesoki does not expect the decision to impact credit growth negatively, “though it could affect the amount of liquidity available for investing in Treasuries.”