Banks operating in the local market started on Sunday a wave of major cuts in their interest rates and some loans, in response to the decision of Central Bank of Egypt (CBE) to reduce its basic interest rate by 1%, a move that is the first of its kind since 3 November 2016.
This came at a time when the National Bank of Egypt (NBE) and Banque Misr (BM) responded to the decision when it was issued on Thursday, where both banks cancelled the 20% saving certificates and introduced other certificates with lower returns. The banks also decided to cut the rate on the other high-yield certificates and said it will reconsider interest rates for the remaining saving certificates in the coming period to match the decision of the CBE and market variables.
In a similar move, Banque du Caire also decided to issue a new savings certificate on Sunday at a 15% interest rate for three years, with revenue disbursed on a monthly basis.
In its meeting held on 15 February 2018, the Monetary Policy Committee (MPC) decided to cut the overnight deposit rate, overnight lending rate, and the rate of the Central Bank of Egypt’s (CBE) main operation by 100 basis points to 17.75%, 18.75%, and 18.25% respectively. The discount rate was also cut by 100 basis points to 18.25%.
In its statement, issued in relation to the interest rate decision, the CBE said that inflationary pressures have been contained, a consequence of tighter monetary conditions. This has been evidenced by the relatively tame monthly inflation figures, despite being affected by the upward adjustments of regulated prices.
As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 100 basis points. This remains consistent with tight real monetary conditions, a necessary requirement to achieve the inflation target of 13% (±3 percent) in Q4 2018 and single digits thereafter.
Annual headline and core inflation rates declined for the sixth consecutive month in January 2018 to record 17.1% and 14.4%, in line with expert forecasts, after peaking in July 2017 at 33.0% and 35.3% respectively. Headline and core annual inflation rates thereby registered the lowest rates since October 2016 and September 2016 respectively. Favourable base effects have been accelerating the decline of annual inflation rates since November 2017.
Meanwhile, the CBE added, real GDP growth continued to improve for the fifth consecutive quarter to record 5.3% in December 2017 and 5.0% during 2017, the highest economic growth since 2010.
The picking up of economic growth was significantly boosted by higher net external demand, due to more competitive exchange rates, followed by public domestic demand, which has more than offset lower private domestic demand.
Output growth by economic activity was relatively diversified, 83% of which was provided by the private sector.
The pick-up of economic activity coincided with the continued narrowing of the unemployment rate to 11.3% in December 2017, registering the lowest rate since December 2010.
The MPC closely monitors all economic developments and will not hesitate to adjust its stance to achieve its mandate of price stability over the medium term.
Immediately after the CBE announced its decision, the NBE announced stopping its platinum 20% savings certificate, which was offered for 18 months. This suspension will be effective starting from Thursday 15 February 2018. The NBE has collected EGP 400bn from offering them.
The bank pointed out that customers who have this certificate will enjoy it until the maturity date of their certificates, so that the value of the certificate will be added to their accounts by the bank upon maturity and they must submit their instructions to the bank on time.
The NBE also announced a reduction in the rate of return on new certificate purchases to become at 15%, down from 16% and for three years starting from Sunday 18 February 2018.
The three-year certificate will be renewed based on the return applicable at the time of renewal.
The bank also announced the launch of a new one-year quarterly-return certificate with an annual return of 17% available to customers starting from Sunday 18 February 2018.
The bank also noted that it is also reviewing the prices of the rest of the savings vessels in Egyptian pounds in the coming days, in line with MPC decisions and market variables.
In a similar move, BM decided to cancel the savings certificates with 20% interest and introduce a substitute with 17% interest for one year that will offer returns on a quarterly basis.
The bank also decided to cancel the savings certificate with a return of 16% and issue a new one of 15% for three years with a monthly disbursement of returns.
Mohamed Abdel Aal, a board member of the Suez Canal Bank, said that most of the expectations were that the CBE would cut interest rates, while few observers ruled out the possibility of any reduction this time.
“Although the cut was small, the CBE’s decision itself explains that its policy has been successful to curb inflation and put it down to 17.1% at the end of January, which means that the CBE is moving in the right direction to achieve a 13% rate at the end of the year,” he added.
He noted that monetary policy also succeeded in supporting the exchange rate liberalisation phase, and achieving stability, eliminating the black market, supporting foreign exchange reserves, and boosting remittances from Egyptians abroad, as well as increasing foreign direct investment, which supports the competitiveness of the market and a high growth rate for the economy.
Abdel Aal pointed out that this limited cut will not affect the rates of household savings in banks, because the rates of interest on savings in Egyptian banks are still high.
He added that other banks in the local market will reduce the interest on their various savings accounts by the same rate as CBE’s 1%.
He explained that it would lead to low cost of funds in banks, which is expected to increase the profitability of banks.
“The relative decline in the cost of funds will lead to a lower cost of lending and financing rates for large companies and projects, which were limited by the high cost in the past,” he added.
He pointed out that the rate cuts by the CBE gives an indication that this may be the beginning of the end for the CBE’s tight monetary policy, which is expected to have a positive impact in stimulating economic activity and increasing growth rates.
According to Abdel Aal, a cut in interest rates will inevitably lead to a reduction in the prices of debt instruments. “Egypt succeeding in marketing the new bonds issued in international markets at lower interest rates, which will lower the cost of government borrowing and then achieve a gradual decrease in the budget deficit,” he said.
Finally, Abdel Aal stressed that one of the most important expected results of the CBE’s interest rate reduction is the return of private sector activity, the re-operation of some closed factories, and the beginning of the return of some funds that were stored in high interest deposits, to be directed to real investment.