Central Bank of Egypt to raise interest rate on the pound

In its last Thursday meeting, Monetary Policy Committee (MPC) in Central Bank of Egypt decided to raise overnight deposit rate, overnight lending rate by 50 basis points to 9.25 percent, and 10.25 percent, respectively. This marks the first rise under CBE's new Governor 'Tarek Amer', and the last this year.

The "CBE" indicated in a statement that it had agreed with the government during last week's Coordinating Meeting to work out a plan for microeconomic stability that will contribute positively to economic growth, local production increase, and job creation. The plan will be reviewed during Coordinating Council's special meeting scheduled on next January 10, 2016.

In a related context, MPC of the American Federal Reserve System decided for the first time since 11 years that it will raise the prime rate of interest by a quarter of a percentage point, thus jumping to an estimation between 0.25 percent and 0.50 percent. The decision ends a prolonged controversy over the capacity of the world's largest economy to endure a possible raising of borrowing costs. Saudi Arabia, Kuwait, Bahrain, and UAE all were motivated by the American move as they took similar steps through raising the rate of interest by a quarter of a percentage point, too.

Nady Azzam, a financial analyst, pointed out in earlier pronouncements to 'Al-Arabia' news website that Egyptian CBE's raising of interest rates will give rise to an increase in liquidity levels in local market, thus enhancing the government's ability to finance public expenditure. However, he ruled out the possibility that a connection may exist concerning the decisions to raise interest rates taken by both Egyptian CBE and its American counterpart. 

A survey conducted by Pharos Holding Corporate for Research has showed that liquidity has jumped to the highest level in its history due to deficit monetization measures implemented by CBE. CBE's stored liquidity has approximated L.E 159.6 billion by the end of last September, thus drawing to its highest-ever level recorded in July 2008, which amounted to L.E 193.5 billion. 

Azzam expected a general rise in liquidity levels following the rise in interest rates on deposit certificates. Rise in liquidity, he assured, will boost CBE's capacities to stand up to exchange black market, and so provide necessary liquidity for financing public expenditure. 

Azzam predicted potential negative effects out of CBE's decision on interest rates. These may include increasing recession, and exceptionally high inflation rates. In turn, these last two will have their effect on raising borrowing cost, particularly in light of government’s dependence on borrowing to finance the budget deficit, which will relentlessly act upon the state’s general budget following the rise in the charges of public debt services, as well as steadying the decrease in Gross Domestic Product (GDP). Nevertheless, Azzam insisted these effects would be limited as long as the government persists with regulating prices and monitoring retail markets.

It is worthy mentioning that CBE has decided last Thursday to carry over its much-anticipated decision regarding interest rates until yesterday, leaving a room for more deliberations with the government over inflation and growth. It has also formed a coordinating working group including representatives from CBE, the ministries of Finance, Industry and Foreign Trade, and Investment, for the sake of developing a work-plan suggestion for coordinating fiscal and monetary policies. The suggestion will be reviewed during the second meeting of the Coordinating Council of Monetary Policy early January.