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The Central Bank of Egypt (CBE) has decided to cut interest rates based on new data on expected inflation rates in Egypt.
The Egyptian Central Bank's Monetary Policy Committee announced Thursday that the credit and discount rate had been reduced by 150 basis points from 1.5% to 14.75%.
The bank's motivation for reducing rates was based on the continued decline in the general inflation rate and core inflation, falling to 8.7% and 5.9%, respectively. % in July 2019.
The central bank has considered this step in the light of slowing growth in the global economy and the negative impact of trade tensions on growth prospects, in order to contain inflationary pressures and all local developments and global.
In its statement, the Central Bank intends to make decisions based on expected future inflation rates and not prevailing inflation rates based on the consistency of forecasts. inflation with target rates, in order to ensure the continuation of the downward trend of price stability in the medium term.
"Negative reflections"
Economist Abdel Hafez El-Sawy warned of the negative impact of the decision to cut interest rates in Egypt, saying that "governments are seeking to lower the interest rate to stimulate business activity and encourage producers and investors, but in return, the reduction in interest rates pushes foreign investors to invest in domestic debt.About $ 20 billion affect the value of these investments, which help support the exchange rate by creating more This allowed the government to maintain the exchange rate and to devalue the foreign currency against the local currency.
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Sawy added, in a private interview with "Arabian 21": High interest rates for more than four years in Egyptian banks have impacted the cost of producing goods and services and have prevented the Egyptian producer from competing in the Egyptian or international market. It is therefore in the interest of producers and investors to borrow or invest at a lower interest rate. "
He pointed out that the reduction of the interest rate supported foreign or domestic direct investment and consequently led to lower prices for goods and services, both in the domestic market and in exported goods.
"The interest rate cut will also affect foreign direct investment related to the state's public debt in bonds and will reduce the debt burden on the state budget, but this could result in the outflow of these investments in search of high interest rate markets. "
"Positive data"
As regards the positive data on the situation of the Egyptian economy and the fall in inflation and unemployment rates, which the Central Bank explained in the reasons for its decision to reduce interest rates, Mr El -Sawy pointed out that Egypt's inflation rates were being manipulated, pointing out that the Egyptian economy was suffering from a defect that did not exist. The rate of inflation is the stability of wages.
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He pointed out that "the annual increase rates, whether on the wages of government employees or on other very low rates, do not respond to rising inflation rates", adding that inflation in Egypt is linked to the supply side of the high cost of production, especially after the liberalization of fuel prices In addition, production in Egypt depends heavily on the import of tools, production machinery and inputs, which increases the cost of production in Egypt.
Al-Sawy pointed out that the presence of a high liquidity in the demand of the citizens increased the rates of inflation, in addition to the current recession and the absence of reassuring investment trajectories for savers and therefore a rise in consumption and inflation rates.
On the relationship between interest rates and the exchange rate, El-Sawy said, "This relationship is tangible in many economies that suffer from the depreciation of the currency such as the Egyptian economy. the interest rate mechanism to induce individuals not to convert to foreign exchange or the phenomenon of dollarization.For example, we note in the Egyptian experience that the interest rate on deposits in Egyptian pounds is higher than the one on the dollar and other foreign currencies.
Ashraf Dawaba, professor of economics at Sabah Zaeem University in IstanbulArabic 21"The rate cut is positive because it encourages investment and provides better financing, but these investments are" under the control of the army that controls the Egyptian economy, "he said.
"With the reduction in the interest rate, foreign investors will be forced to get rid of treasury bills and existing bonds and seek a better haven for the best interest rate," said Dowaba.
Dowaba confirmed that the components of the Egyptian inflation index were unknown and illogical, wondering how the inflation rate had dropped as fuel prices had risen.
He added that the demand for foreign currency by foreigners could lead to an increase in the exchange rate due to the liquidation of Treasury bills by foreigners, which would create an increased demand for the dollar and bring down the local currency.
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