Change of winds

Published on Al-Ahram weekly, Issue No. 1074, by Niveen Wahish and Nesma Nowar, 1 – 7 December 2011.

The Central Bank of Egypt (CBE) took everyone by surprise when it decided to hike the interbank and discount rates last week. After two years of keeping the rates unchanged, the monetary policy committee of the CBE decided to raise the overnight deposit rate by a whole percentage point, to 9.25 per cent while raising the overnight lending rate and the seven-day repo by half a percentage point to 10.25 per cent and 9.75 per cent, respectively. The discount rate was also raised by one percentage point to 9.5 per cent … //  

… Pre-emptive move:

Last year Sherine Ahmed had deposited LE100,000 at one of the national banks for three years at an interest rate of 9.5 per cent. Today she is thinking of withdrawing that amount, at the risk of paying a fine. She wants to redeposit the sum and take advantage of the higher interest rate national banks recently started offering. In fact early in November, the National Bank of Egypt and Banque Misr, Egypt’s largest public sector banks, raised the interest rates on their three-year Egyptian pound certificates to reach 11.5 per cent, up from 9.5 per cent. This move prompted other private sector banks to raise the interest rates on their deposits as well.

According to Hamdi Abdel-Azim, professor of economics and former president of the Sadat Academy for Administrative Sciences, banks have raised interest rates in an attempt to attract deposits and provide liquidity for domestic government borrowing. “Banks have a great chance to make profits from such high yields,” he said. “This is considered a secure investment for banks.”

Abdel-Azim also attributed the increased interest rates to the need to boost demand on local currency by making its yields more attractive.

Raising the interest rate “encourages people to put their deposits in Egyptian pounds rather than foreign currencies,” he said.

Iman El-Ayouti, senior economist at the Egyptian Centre for Economic Studies, gives a similar explanation. She said that although Egyptian citizens have for long complained of particularly low interest rates, the timing of this move can partly be explained by commercial banks’ need to pool much needed funds for government lending purposes through purchasing the government’s treasury bills.

In November 2011, the yield on the six-month treasury bills was 13.8 per cent and 14.7 per cent on one-year bills, both marking the highest levels since late 2008.

She added that the move might be also oriented towards encouraging citizens to save as a means of releasing their hoarded cash holdings.

“We hope to see banks direct their funds to investment-oriented projects, in addition to their shouldering of the budget deficit.” El-Ayouti said. “Investment is a dire need for job creation at this delicate juncture.”

Meanwhile, Abdel-Azim stated that increasing interest rates could be counter-productive for investment and the stock market. However, he believes the investment climate and stock market are already in a critical situation as a result of the country’s political instability. As for how long the interest rates might remain this high, Abdel-Azim expects they may decrease but not before a year.

One source at Credit Agricole Bank, who asked not to be named, agreed with Abdel-Azim. Increasing interest rates, the source said, might harm the economy by discouraging investment, because people may prefer to put their money in banks and receive a fixed monthly interest rate.

According to the source, the interest rates announced by the two public banks are exaggerated. He explained that his bank introduce an interest rate of 10 per cent on the three year certificate of deposits, which was considered the highest interest rate.

The source said that after the two banks announced their 11.5 per cent interest rate, depositors started to withdraw their deposits from his bank in order to benefit from the higher interest rate. “Normally differences between interest rates introduced by banks do not exceed 0.5 per cent, however this time the difference is 1.5 per cent,” the source said. “I may be no longer able to attract depositors.”

The source added that not all banks will be able to increase their interest rates, as each bank has its own strategy and liquidity pressures which are key determinants for such a decision. He said he believes that the two public banks’ move was taken primarily to maintain the current deposits they have and to provide enough liquidity for lending by attracting more depositors. (full text).

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