Egypt Lifts Banks' Reserve Requirement Amid Inflation Battle

Updated on
  • Ratio to increase to 14% from 10%, central bank says Wednesday
  • Measure will give flexibility for bank to cut rates: analyst

Egypt’s central bank will increase the reserve requirement for lenders next week, potentially paving the way for cutting interest rates even as it battles soaring inflation triggered by a sharp currency devaluation.

The reserve ratio, used to control money supply, will increase to 14 percent from 10 percent from Oct. 10, the regulator said on Tuesday. It said the measure was “suitable” given the banks’ performance and profitability.

The pound has lost about half its value to the dollar since it was floated in November to end a crippling currency shortage, helping to send inflation above 30 percent and heaping pressure on struggling households. The central bank responded by capping lending to the government and raising interest rates by seven percentage points, but now faces criticism from business leaders who argue that high borrowing costs stifle growth and add to the debt-servicing bill.

The Emirates NBD Purchasing Managers’ Index, an indicator measuring activity in the non-oil private sector, reversed two months of gains in September.

“This move signals that we will see an interest rate cut soon,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. “The central bank is trying to control liquidity using tools other than interest rates.”

Egypt’s benchmark EGX 30 index of stocks fell 0.8 percent to its lowest intraday level in about a week as of 11:57 a.m. in Cairo, led by Commercial International Bank’s 2.1 percent decline.

The International Monetary Fund, which is supporting Egypt’s economic reforms with a $12 billion loan, said last week there were early signs that inflation is easing, echoing the recent view of Egyptian officials. The central bank kept its benchmark interest rate unchanged at 18.75 percent last week.

Rising Prices

Annual core inflation, which strips out volatile and regulated items, fell slightly to 34.9 percent in August from 35.2 percent a month earlier, while monthly price gains dropped to 0.32 percent from 2.76 percent in July. The IMF predicts headline inflation will slow to around 10 percent by mid-June 2018, from 31.9 percent last month.

Egypt’s reform program, centered on the flotation and two rounds of fuel and electricity price increases, helped reverse a hemorrhaging of foreign-currency reserves that now stand at a record above $36 billion. Foreign portfolio inflows have also surged, and overseas holdings of Egyptian Treasury bills -- fueled by rates of about 20 percent -- stood at $17.9 billion at the end of September.

At the same time, Egypt’s foreign debt load has risen to $79 billion in June from $55.8 billion a year earlier, according to central bank data.

The latest measure returns the reserve requirement to the same level as it was from 2001 to 2012, the central bank said, before it was gradually lowered to help lenders meet liquidity requirements.

The decision will not negatively impact credit growth given the low loan-to-deposit ratio in the banks, according to Reham El Desoki, senior economist at investment bank at Dubai-based Arqaam Capital, though it could affect the amount of liquidity available for investing in Treasuries.

“Banks are likely to respond by lowering rates offered on customer deposits and by asking for higher yields on government treasuries, raising the cost of borrowing for the government,” said El-Swaify at Pharos Holding.

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