Winners, Losers from Egypt's Central Bank Decision to Hike Rates

The Monetary Policy Committee of the Central Bank of Egypt (CBE) decided in its meeting this evening to raise the overnight deposit and lending rates and the central bank’s main operation rate by 200 basis points to reach 21.25%, 22.25% and 21.75%, respectively. The credit and discount rates were also raised by 200 basis points to reach 21.75%.

Winners, Losers from Egypt's Central Bank Decision to Hike Rates

Losers:

- Government

In previous statements by the Egyptian Minister of Finance, Mohamed Maait said that any interest rate increase of 1% would result in the state treasury bearing 70 billion pounds.

He also added: "I hope that interest rates will be reduced, so that I can pump more money into education, health, and citizens' livelihoods to compensate for the current difficult economic conditions."

- Gold

Gold dealers, especially sellers, are harmed, as the money available for purchase will go to banks to benefit from high interest rates and without the risk of price fluctuations.

- Stock market

Financial markets are usually affected by the going of available funds into higher-yielding debt instruments, in addition to a decrease in appetite for stocks as they are more risky.

- Companies and the private sector

The private sector will be harmed through manufacturers and service providers, as higher interest rates will force them to reduce borrowing, and thus halt any plans for growth and expansion.

- Job seekers

Job seekers are one of the groups most affected by the increase in interest rates, especially after most companies gave up on expansion plans and relied on hiring new workers.

Winners:

- Investors in debt instruments

As interest rates rise, the return rates on debt instruments rise, especially Treasury bills and bonds.

- Depositors

Depositors are considered one of the most important groups that will benefit greatly from the rise in interest rates, as the return on their money will increase when deposited in the banking sector.

Meantime, the central bank said in a statement that the real GDP recorded a growth rate of 2.7% during the third quarter of 2023, compared to a rate of 2.9% during the previous quarter. The growth was supported by positive contributions from the trade, agriculture and communications sectors.

Despite this, initial indicators for the fourth quarter of 2023 point to a slowdown in economic activity. Accordingly, it is expected that the GDP growth rate will slow during the fiscal year 2023/24 compared to the previous fiscal year, and will gradually recover thereafter. This was in line with the actual developments in the data, as well as the negative repercussions resulting from the state of regional instability and disruption of navigation traffic in the Red Sea on the services sector.

Regarding the labor market, the unemployment rate stabilized to record 7.1% during the third quarter of 2023.

The bank confirmed that the annual rates of general and core inflation continued to decline to record 33.7% and 34.2%, respectively, in December 2023, driven by the positive impact of the base period. While current developments indicate the continuation of inflationary pressures and their rise above their usual pattern, which is reflected in the inflation of both food and non-food commodities. These pressures are expected to continue in light of public financial control measures, as well as continued pressures from the supply side.

 In addition, the higher rate of domestic liquidity growth than its historical average contributed to the escalation of inflationary pressures.

The bank explained in a statement that at the global level, economic activity was characterized by a slowdown as a result of the restrictive monetary policies followed by the major central banks.

Global inflationary pressures have also decreased recently as a result of restrictive monetary policies followed in many advanced and emerging economies, and accordingly, expectations of inflation rates for those economies have declined compared to what was presented at the previous meeting.

Despite this, there is a state of uncertainty about inflation expectations, especially with regard to global commodity prices, as a result of the geopolitical tensions that the world is currently witnessing, as well as the disruption of shipping traffic in the Red Sea.