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Sunday, 9 July 2017

CBE raises interest rates 200 bps

The CBE’s Monetary Policy Committee decided to raise interest rates by another 200 bps in its meeting last Thursday, marking the third such interest rate hike since the EGP float and a 700 bps increase in borrowing costs since then. The overnight deposit rate was raised to 18.75% from 16.75%, while the overnight lending rate increased 19.75% from 17.75%. The CBE’s main operation rate grew to 19.25% and the discount rate was also raised to 19.75% from 17.75%, according to a statement from the CBE.

Fuel, electricity hikes to blame: "Higher prices of hydrocarbon products effective June 29, 2017, higher value added taxes effective July 1, 2017, higher electricity prices scheduled for July 2017, as well as other potential regulated price adjustments further increase inflationary pressure," the central bank said, justifying the move. Fuel prices were raised an average 55% late last month, and the government had moved electricity prices last week. Vice Minister of Finance Ahmed Kouchouk had projected inflation would rise 3-4.5% as a result of the fuel hikes. Bloomberg notes the IMF’s hand in this and last May’s interest rate hike as well.

The measure is only temporary: The CBE added that the necessary measures will be taken to lower inflation to 13% by the end of next year, and that the bank envisages “a measured easing of the monetary stance” as soon as underlying inflation begins to slow. "We expect the interest rate decision to be a temporary measure to target inflation," Vice Minister of Finance Mohamed Maait told Reuters. "We expect inflation to fall in early 2018 and thus (we can) begin cutting interest rates." Government sources have reiterated that the move was temporary in statements to Al Masry Al Youm.

Impact on the FY2017-18 budget: This latest rate hike, and the 200 bps hike from last May, were not taken into account in the FY2017-18, which parliament passed last week, said Maait. The interest on current and future debt was calculated at EGP 381 bn, Maait tells Reuters. He expected adjustments to that figure in the light of the change in borrowing costs. Sources from the Finance Ministry tell Al Mal that the latest hike could raise the budget deficit by another EGP 30 bn. The budget, which has yet to be ratified by President Abdel Fattah El Sisi, projects a budget deficit of EGP 370 bn.

“The impact of [Thursday’s] hike would be diluted as banks are unlikely to pass it on to their deposit and savings rate,” said CI Capital’s Hany Farahat — the sole economist polled by Reuters and Bloomberg to predict the hike was coming. Banque Misr Chairman Mohamed El Etreby announced that his bank would hold interest rates on 20%-yielding deposit certificates, according to Al Masry Al Youm. Top state-owned banks will await until their Alco (assets and liabilities committees) meetings this week to determine how they will move as a result of the hike, Youm7 reports. Farahat notes that the hikes will have a very minimal impact on inflation.

Egypt’s business sector, still reeling from last May’s 200 bps hike, denounced the move. “The [latest] interest rate hikes will have a negative impact on consumer prices in the coming period,” said the head of the food industries division of the Federation of Egyptian Industries (FEI), Ashraf El Gazayerli. He tells Al Mal that raising borrowing costs will be passed on to the consumer. The interest rate increase "will have a devastating impact on industry (in general) and the pharmaceutical sector," SEDICO Pharmaceutical Company CEO Hossam Aboul El Enein tells Reuters. Top executives from Fancy Food, Spinney’s Egypt, and Universal Group also took to the pages of Al Mal to raise their concerns about the interest rate hikes. Some are projecting inflation to rise 5-7% while others are saying that the move may lead to further cuts in CAPEX.

Banking sector heads who spoke up relayed a more positive message. National Bank of Egypt President Hisham Okasha defended the move, saying it was necessary to keep inflation resulting from the price increases in fuel and electricity at bay, AMAY reports. Other banking sector executives to come out praising the move include Emirates NBD’s Deputy Managing Director Sahar El Damaty, and Suez Canal Bank president Hassan Refai.

Meanwhile, MPs of the Support Egypt Coalition are calling for an urgent party meeting to discuss the interest rate hikes and its impact on industry. They are also requesting that a special session to probe the hikes be taken, Al Shorouk reports.

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