Analysts expressed different opinions on the success of the Central Bank of Egypt’s (CBE) decision of raising reserve requirement for banks.
This decision aims to reduce inflation rates to 17% by 2018 as an alternative solution for boosting interest rates to face the internal liquidity ratios, analysts told Mubasher.
The CBE will lift the cash reserve ratio (CRR) to 14% from 10% starting from 10 October 2017.
On the contrary, analysts believe that this will not reduce prices due to the consecutive gap between inflation rates and deposit interest rates.
Senior Economist at CI Capital Hany Farahat forecasted inflation to drop to 17% by 2018, affected by the CBE’s decision regarding the CRR.
Raising the CRR was expected to restrain the increase in internal liquidity ratios, which started to show since the beginning of the country’s economic reform programme in November 2016, Farahat added.
The economist highlighted that this method is a part of the CBE’s strategic plan to keep inflation rates in check and stand up to the growth of cash liquidity.
A double-edged sword
On the other hand, former board member at the Egyptian Gulf Bank Saeed Zaki said that raising reserve requirement ratios (RRR) may not affect in diminishing inflation due to the consecutive gap between inflation rates and deposits interest rates.
This gap will remain the same because lifting up RRR will cut deposit rates, whereas forecasts indicate to a decrease in inflation rates if the gap maintained with no changes, Zaki continued.
Boosting RRR will cause an increase in interest cost and will push banks to lower deposit rates, he added, anticipating banks’ investment deposits to drop to 86% from 90%.
Zaki noted that the CBE’s decision will narrow lending rates and will encourage financing new investments.
Esraa Ahmed, economist at Mubasher International, said that lifting CRR will have a minor impact on shrinking inflation rates.
The market usually takes time adapting to inflation’s effects and the monetary policy has no effective impact to control it, which has been clear after interest rates rose by 7% since the flotation of the EGP, Ahmed added.
Upon lifting reserve requirement, the CBE turned to alternative ways in an attempt to cut inflation, instead of raising interest rates to control liquidity.
The economist noted that raising CRR will have a marginal impact, as the main reason for inflation is the rise in production cost.
It is worth mentioning that annual inflation rate dropped to 34.86% in August 2017, versus 35.26% in July 2017.
The RRR settled at 14% between 2001 and 2012, and was gradually lowered since January 2011 by 4%, until it reached 10% to support the Egyptian banking sector.