Following the US Federal Reserve’s decision, will the central bank raise interest rates this month?

The Egyptian financial and business sector is waiting for interest rates during the meeting of the Monetary Policy Committee of the Central Bank of Egypt, which is scheduled to be held on May 19, especially after the Federal Reserve raised the US interest rate by 50 basis points. increase in interest rates over the past two decades.

The stages of development of interest rates and inflation in Egypt

The Egyptian market witnessed a gradual decline in the core inflation rate during 2020, praised by the International Monetary Fund in a report on Egypt’s success in curbing inflation, emphasizing that Egypt had the largest annual decline in the inflation rate in 2020 compared to 2019, a decrease of about 8.2%.

Inflation rates have fallen despite the outbreak of the Corona virus and the emergence of the first case of corona infection in Egypt in March 2020, which prompted the Central Bank to cut interest rates during the year 2020 to support the local economy, and support projects to cope. the repercussions of the pandemic and complete the work and production process, so that interest rates fell by 4% during 2020 from 12.25% for deposit and 13.25% for lending to 8.25% for deposit and 9.25% for lending .

While the first half of 2021 saw a state of stability in economic conditions and a slight increase in inflation rates, which encouraged the Central Bank to maintain interest rates at 8.25% for deposits and 9.25% for lending.

While the second half of 2021 saw a continuous rise in core inflation rates for 8 consecutive months, the core inflation rate reached 10,055%.

This prompted the Central Bank of Egypt’s Monetary Policy Committee at its extraordinary meeting, last March 21, to increase the central bank’s overnight deposit and lending rates and the price of the central bank’s core business by 100 basis points to reach 9.25%. and 10.25%, respectively.

The credit and discount rate was also increased by 100 basis points to 9.75%.

The Central Bank of Egypt has revealed the reasons for its decision to raise interest rates, saying that the Egyptian economic reform program has succeeded in achieving many gains over the past period, most notably the effectiveness of Egypt’s macroeconomic indicators. This paved the way for overcoming any challenges and economic turmoil that may arise due to mainly external factors.

They added that global inflationary pressures have begun to rise again in recent times following the signs of the world economy recovering from the turmoil caused by the emerging Corona virus pandemic, as a result of the developments of the Russian-Ukrainian conflict; As the risks associated with the global economy have increased as a result of this conflict.

The Central Bank added that in addition to this pressure comes the noticeable rise in global commodity prices, supply chain disruption and rising shipping costs, in addition to the fluctuations in financial markets in emerging countries. Which led to domestic inflationary pressures and increased pressure on the external balance.

In the interest of the Central Bank in maintaining macroeconomic stability and its profits, the Central Bank believes in the importance of exchange rate flexibility to serve as a tool to absorb shocks and maintain Egypt’s competitiveness.

He added that in light of these developments; Given the central bank’s target inflation rate of 7% (± 2 percentage points) on average during the fourth quarter of 2022; The Monetary Policy Committee has decided to increase the key interest rates of the central bank by 100 basis points.

The Monetary Policy Committee emphasizes that achieving low and stable inflation rates in the medium term is a prerequisite for supporting the purchasing power of the Egyptian citizen and for achieving high and sustainable growth rates.

The Central Bank noted that the committee will closely monitor all economic developments and will not hesitate to use all its monetary instruments to achieve the objective of price stability over the medium term.

While given the continuing rise in global and local inflation, and Egypt’s dependence on imports from abroad about $ 60 billion annually, with 60% of raw materials, production requirements and strategic goods needed for the industrial production process in Egypt , which is accompanied by imports for global inflation, what will be the Central Bank’s decision on the direction of interest rates at its May 19 meeting ?!

The evolution of the interest rate in Egypt from 2020 to now

the meeting

interest rate

Deposit price Lending rate
16 January 2020 12.25% 13.25%
20 February 2020 12.25% 13.25%
16 March 2020 reduced to 9.25% reduced to 10.25%
2 April 2020 9.25% 10.25%
14 May 2020 9.25% 10.25%
25 June 2020 9.25% 10.25%
13 August 2020 9.25% 10.25%
24 September 2020 reduced to 8.75% reduced to 9.75%
12 November 2020 reduced to 8.25% reduced to 9.25%
24 December 2020 8.25% 9.25%
February 4, 2021 8.25% 9.25%
18 March 2021 8.25% 9.25%
28 April 2021 8.25% 9.25%
17 June 2021 8.25% 9.25%
5 August 2021 8.25% 9.25%
16 September 2021 8.25% 9.25%
28 October 2021 8.25% 9.25%
16 December 2021 8.25% 9.25%
23 January 2022 8.25% 9.25%
21 March 2022 Increase to 9.25% reduced to 10.25%

The evolution of core inflation rates in Egypt from 2020 to now

the month Inflation rate
January 2020 7.2%
February 2020 5.3%
March 2020 5.1%
April 2020 5.9%
May 2020 4.7%
June 2020 5.65%
July 2020 4.2%
August 2020 3.4%
September 2020 3.7%
October 2020 3.9%
November 2020 4%
December 2020 3.80%
January 2021 3.637%
February 2021 3.645%
March 2021 3.672%
April 2021 3.331%
May 2021 3.413%
June 2021 3,849%
July 2021 4.567%
August 2021 4.526%
September 2021 4,848%
October 2021 5.5221%
November 2021 5.79%
December 2021 5.968%
January 2022 6,269%
February 2022 7,234%
March 2022 10,055%

Global central banks raise interest rates

Since the beginning of 2020, during the pandemic months, central banks have been conducting monetary easing cycles to lower interest rates and pump more liquidity to support the economies of institutions and individuals.

While many central banks around the world have begun to shift their orientations to raise interest rates to reduce inflationary pressures, especially after the escalation of the Russo-Ukrainian war.

In turn, the Federal Reserve announced its intentions to raise interest rates 8 times over the next 3 years, as part of a plan to tighten monetary policy to address high levels of inflation in the United States, as the US inflation rate has reached its highest. level in 40 years, by 6.2%.

The Fed today began its plan by deciding to raise the US interest rate by 50 basis points, in a move that is in line with expectations and in the largest rate hike since 2000, after deciding to raise the interest rate at its meeting on March 19 last with 25 basis points, for the first time since 2018.

The bank has also indicated that it will start reducing its holdings of assets, which amount to about $ 9 trillion, from the first of next June.

The plan includes reducing the holding of treasury bonds and mortgage-backed securities by $ 30 billion and $ 17.5 billion, respectively, before increasing the size of the asset reduction after $ 3 billion to $ 60 billion and $ 35 billion, respectively.

The Bank of England has also decided to raise the interest rate to 0.25% from 0.1%, surprisingly, due to inflationary pressures.

Meanwhile, the Russian Central Bank has raised interest rates from 9.5% to 20%, due to pressure on the Russian currency as a result of the Russo-Ukrainian war.

In the same vein as the US Federal Reserve, the UAE Central Bank today decided to increase the interest rate on overnight deposit facilities by 50 basis points, and to maintain the rate applicable to short-term lending by the central bank through all existing credit facilities at 50 basis points above the base rate. .

The Central Bank of Bahrain also decided today to increase the key interest rate by 50 basis points to reach 1.75%.

And the Central Bank of Kuwait followed suit and increased the discount rate today by 25 basis points to reach 2%.

Expectations of the decisions of the Central Bank of Egypt at the next meeting of the Monetary Policy Committee

In this regard, EFG Hermes chief economist Mohamed Abu Basha expected a 2% increase in interest rates over the coming period, in order to strike a balance in the market with the expected rise in prices in general.

Abu Basha pointed out that the increase in local inflation levels is expected to be similar to the rise in the rate of global inflation, which has led to a significant rise in food prices, so that the government has controlled the markets by controlling the price of bread and to provide basic commodities. .

He added that during the current period, the government’s policy will focus on providing commodities and ensuring that there is no shortage of them, especially food commodities. He expected domestic inflation to rise to 14% and 15% over the next few months. will rise, before declining to its natural rates between 7% and 8% at the beginning.Next year.

Radwa El-Swaify, head of research at Al-Ahly Pharos Securities Brokerage Company, in turn expected the Central Bank of Egypt to raise interest rates by about 1% at the next meeting of the Monetary Policy Committee, provided it depends on the Central Bank of Egypt. Bank’s monitoring of developments in global markets and the Federal Reserve’s decision.

She pointed out that inflation rates had risen during the current April and reached 10.5% year-on-year, which was expected due to the rise in international commodity prices and the rise in production inputs, and thus the rise in prices of directly affected consumer goods.

Al-Swaify expects inflation figures to rise gradually and slightly over the coming months until it reaches its highest level in August 2022, approaching 12% year-on-year, after which it will start to decline and return to less than 9%. from February 2023.

She added that the current rise in inflation is a coincidental rise due to global events, either in the lack of supply chains, which has led to a decline in the supply of goods worldwide, or the rise in energy prices, which has led to an increase in product prices.

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