What Does the Central Bank’s Key Interest Rate Increase Mean for Egyptians?
The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has announced a hike in key interest rates on March 30, amid rising inflation affecting both businesses and private citizens.
The news made the rounds in Egypt a major development, but for some, the purpose of such a decision and its direct effects were not clear.
Here, Streets of Egypt answers a few questions that may help clarify some of the details of this change.
Why were key interest rates raised and what does the decision aim to achieve?
Interest rates are the percentage of return on deposits plus the cost of borrowing money that is paid back with the amount borrowed. Lower interest encourages people to spend their money, rather than save it, and to borrow even more and spend it on buying housing or expensive goods, or investing in a business, for example.
On the other hand, higher interest rates encourage people to save more of their income, to take advantage of the higher returns and to avoid borrowing at a higher cost.
By raising interest rates, the CBE has saved and deposited money, rather than keeping it liquid for spending. People will certainly continue to spend and spend, but the share of their income that they designate to spend will decrease in favor of the share that they set aside and deposit, leaving them out of circulation .
How will this change affect the Egyptians?
This change is likely to affect different groups in society differently. For example, for a business owner, higher interest rates may mean higher costs of capital. Businesses regularly borrow and use credit. When interest rates rise, the cost of credit and borrowing increases, making businesses less profitable, and the demand for their products or services decreases.
Meanwhile, for people with savings, higher interest rates mean an opportunity to earn more on those savings.
Finally, the contractionary impact of rising interest rates may affect people who do not fall into any of the above categories. Higher interest rates result in reduced supply and demand, which contracts the country’s economy, affecting business activity and the job market. This contraction affects the spending power and livelihood of private citizens.
How does this relate to current inflation and devaluation?
The CBE’s decision to raise interest rates is a direct response to the skyrocketing inflation in Egypt, and was predicted by many analysts before the announcement.
In recent months, and as a result of the significant devaluation of the Egyptian pound, many are choosing to save or invest through other means than the local currency. Those who could, exchanged pounds for US dollars or other fixed currencies, while others invested in gold or real estate.
Demand for the local currency is likely to increase due to raising interest rates and thereby attracting Egyptians to save their money in Egyptian pounds. Egyptians who have exchanged their savings into US dollars are encouraged to re-acquire Egyptian pounds, as the return on those may be higher.
However, for the Egyptians to be encouraged to do so, interest rates would have to be higher than the inflation rate. That is to say, if an Egyptian were to deposit EGP 100 in the bank, knowing that the Egyptian pound will devalue by 20 percent, they would need the interest rate to be higher than 20 percent if they wanted to ensure that the value of the money actually increases in deposit.
As Egypt grapples with its current currency crisis, most are uncertain about how their decisions will play out in the long run. However, the government hopes that this decision will help mitigate the effects of rising prices and revive the value of the Egyptian pound.
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