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Growth concerns behind CBE decision to hold rates – Pharos

Growth concerns behind CBE decision to hold rates – Pharos
Central Bank of Egypt (CBE) governor, Tarek Amir - Photo Credit: Reuters

Mubasher: The Central Bank of Egypt (CBE) surprisingly maintained key interest rates on last Thursday against all expectations, according to a report by Pharos Research on Sunday.

Earlier, the research firm expected the Monetary Policy Committee (MPC) to hike policy rates in order to ease inflation rate and to create an attractive spread between the return on USD and EGP fixed income instruments, thus capturing foreign fund inflows into the Egyptian market.

Although research agencies and experts built their hike grounds on the soaring inflation rate, the CBE described the factors behind this aggressive rate as “transitory cost-push factors,” including higher electricity bills and the increased demand on food items in Eid El Adha, rather than demand factors, which means that raising rates would not have controlled inflation.

The research firm believes the reason behind this decision is the country's weakened GDP growth, particularly with the current weakness in investment expenditures, as well as concerns over increasing the debt service burden that currently stands at 30% of fiscal expenses.

"We realize the growth dynamics are not supportive of a rate hike and that our leading indicator, Industrial Production Index, depicts weak growth figures over the last three quarters, mostly due to the FX shortage overhang, which had its toll on business confidence and activity", the research  firm cited the MPC Monitor Note published on 18 September

Pharos anticipated that this decision has nothing to do with devaluation as it will continue to happen without either raising or maintaining the rates.

"Attracting foreign fund inflows is not only a matter of attractive rates, but also a matter of confidence in the banking system, exchange rate stability, absence of a parallel currency market, removal of capital controls and a functioning repatriation mechanism. If these pre-requisites are secured, lower rates should actually follow, in order to spur investment expenditure and steer the wheel of the economy", the report explained.