Sunday 27 September 2020
Books – Mustafa Eid:
The Central Bank closed the curtain on the controversy that arose among analysts and bankers regarding expectations for the interest rate decision last Thursday, when a decision was issued that favored the expectations of the reduction, but it was not up to their expectations for the rate of reduction.
The central bank announced its decision last Thursday in a long-awaited statement until it was issued in the near hour at midnight after a meeting of the Monetary Policy Committee, which may have indicated the difficulty of the decision taken, and the many factors involved in its making.
According to the statement, the central bank decided to cut interest rates by 0.5% for the first time after 4 consecutive times of stabilization, to reach 8.75% for deposit and 9.75% for lending, and the Monetary Policy Committee has two meetings during the current year, one on November 12, and the other on December 24. After it met on Thursday for the eighth time this year.
The last time the central bank cut interest rates this year by 3% was on March 16, as it was an exceptional and preemptive cut in an emergency meeting in order to face the repercussions that were expected from the spread of the new Corona virus.
Perhaps important decisions of some government banks last week carried indications of the decision that he intended to take last Thursday, which included stopping the issuance of a savings certificate for a year of 15% at the National Bank of Egypt and Egypt, in addition to reducing the interest on some investment certificates issued by the National Investment Bank at rates of up to 30%. To 3.75%.
One of the factors that prompted the Central Bank to make its decision to cut interest was the low rates recorded by inflation in recent months, as the annual inflation rate fell to its lowest level during the last 9 months last August, and it reached 3.6% in the total republic compared to 4.6% in July. .
In cities, the annual inflation rate fell to a level of 3.4% in August, compared to 4.2% in July.
The annual inflation rate in August decreased to a level much lower than the central bank’s targets for the inflation rate during the last quarter of 2020 at 9%, an increase or decrease of 3%.
What does the central decision mean to cut interest by 0.5%?
The central bank said in a statement by the Monetary Policy Committee on Thursday that its decision to cut interest rates by 0.5% is consistent with achieving price stability in the medium term, indicating expectations that inflation rates will remain under control and within the target range.
The other factor that the central bank indicated to target from the decision to reduce the basic return rates is that this provides appropriate support for economic activity at the present time, especially after the decline in economic growth rates and high unemployment rates due to the impact of the Corona pandemic on the real economy.
According to the bank, the rate of growth in the gross domestic product decreased to 3.5% during the last fiscal year, compared to 5.6% in the first half of the same year, and unemployment rates increased to 9.6% during the second quarter of 2020 compared to 7.7% during the first quarter.
For his part, Numan Khaled, an economic analyst and assistant manager at Arqaam Capital Investment Bank, told Masrawy that the central bank’s decision to cut interest rates has several indications, the most prominent of which is that the Central Bank is reassured that current foreign investments in debt instruments do not exit, especially with the continued high return it provides. These tools even after the cut.
Khaled added that the other indication is that the Central Bank is also reassured about the fact that inflation rates will not rise above 8 or 9% levels during the coming months and also next year, and therefore there is no fear of lowering interest in light of these levels that fall within its inflation targets in the last quarter of the year.
He pointed out that at the level of influence on depositors, especially with the suspension of 15% certificates, it will not be significant, as there are still certificates available at a price of 12% or slightly less in banks, which is a very positive rate compared to the current rates of inflation that reach between 3 and 4%.
The other message related to the interest reduction is the start of providing an alternative for customers to borrow at reasonable rates when canceling some of the initiatives proposed by the Central Bank to finance various economic sectors with an interest of up to 8% diminishing, especially if this reduction is followed by another reduction from the Central Bank by half a percentage point before the end of this year .
Last December, the Central Bank announced an initiative worth 100 billion pounds to finance the industrial sector at a reduced interest (10% decreasing), then it included the agriculture sector and reduced the interest on it to 8% last March, then the contracting sector joined it at a later time, then It was announced earlier this month that the amount allocated for the initiative would be doubled to 200 billion pounds.
The Central Bank also launched several other initiatives to support a number of sectors with the same interest rate of 8%, including an initiative to finance the tourism sector with a value of 50 billion pounds, and also an initiative for real estate financing for middle-income people worth 50 billion pounds, in addition to the continuation of the initiative to finance small and medium enterprises since the beginning of 2016 with interest 5%, and also the mortgage initiative for low-income people.
For her part, Mona Badir, senior analyst at Prime Investment Bank, believes that these initiatives make the impact of the recent rate cut in limited impact on the borrowing activity from the private sector because it provides financing at lower interest rates than its counterpart outside the initiatives even after the reduction.
Also, this reduction comes at a time when the appetite for borrowing in the household sector is limited, especially with the prevailing uncertainty about the future of the economy, jobs and income, coinciding with the high rate of unemployment, and therefore it is expected that the impact of this reduction will be weak to encourage this sector to increase borrowing, according to What Mona Badir said to Masrawy.
Numan Khaled believes that the central bank’s reduction of interest at this rate will contribute to reducing the high cost of local debt instruments, which is the benefit of the state and also maintains at the same time attracting foreign investments in these instruments, which creates a state of budget.
But Mona Badir indicated that the effect of reducing the interest on the return on debt instruments will be limited, especially since the previous reduction of 3% in March did not have a significant impact on the decline of the return on these instruments, to return to its levels before this reduction, as it was in the range of 14%. Before the March cut, it is now near the 13.5% level.
Mona said that the interest rate cut may aim to deliver a message more than to achieve actual goals at the level of the economy, as the central bank wants with this reduction to reassure the markets of the resumption of the monetary easing cycle, and that the central bank will not delay in supporting the economy, especially as this reduction coincides with the current low inflation rates, And that before it came under some pressure during the last quarter of this year.
Mona Badir added that these pressures include seasonal factors with the return to schools in addition to the impact of the base year. Therefore, the average inflation rate during the quarter is expected to reach 6.2%.