Cairo - Mubasher: MubasherTrade Research said that the recent decision by the Central Bank of Egypt (CBE) to raise interest rates was a surprise move that was not anticipated by most economists given the current economic context.
On Thursday, the Monetary Policy Committee (MPC) of the the CBE decided to raise interest rates by 2% or 200 basis points (bps), increasing overnight deposit interest rate to 18.75%, and overnight lending to 19.75%.
The research firm said in a recent report that its view is that recent interest rate hikes will hardly affect inflation as it is mainly cost driven.
“Higher rates on savings will not offset the inflationary impact of fuel subsidy cuts, electricity prices’ hike, and a higher value-added tax (VAT),” the report indicated.
MubasherTrade expects year-on-year inflation to hit 35% on average in the first quarter of fiscal year 2017/201, noting that favorable base effect may be more powerful in easing inflation rates afterwards.
The report also showed that the foreign exchange market might be the only winner, as yields on treasuries rise, with more foreign investment will likely inflow to the CBE auctions, especially in treasury bills that are more liquid and offer highly attractive rates.
“We note that yields on 182-day T-bills have almost doubled from 11.82% in February 2016 to 21.15% in July 2017, before the latest rate hike,” the report noted.
“Our main concern is the higher pressure on the fiscal front. We find the current monetary policy running counter to the announced fiscal reform program.”
“As interest payments increase, and assuming the CBE will decrease current rates by at least 1-2% by 2018, we update our projection for FY2017/18 budget deficit.”
“We raise our initially projected budget deficit from EGP 418 billion, representing 10.1% of GDP, to around EGP431 billion, 10.5% of GDP,” the report concluded.
