The National Bank of Egypt and Banque Misr just hiked rates on CDs — moves that could see the EGP gain against the USD

NBE, Banque Misr hike rates on CDs: In an unexpected move, the National Bank of Egypt (NBE) and Banque Misr (BM) raised the interest rates they’re offering on three-year fixed-interest certificates of deposit by 125 bps. Starting today, NBE’s Platinum Certificate and Banque Misr’s Al Qimma Certificate will each offer monthly rates of 17.25%, up from 16%.

We think the timing — and direction of the USD right now — are big factors here: The Central Bank of Egypt’s monetary policy committee will next meet to review interest rates in almost exactly one month — but officials have a chance right now to help lock-in the EGP’s recovery from the hit it took after the US and Israel started bombing Iran.

How we see it: The NBE and Banque Misr are moving to soak up liquidity as the EGP continues to strengthen against the greenback. The war in the Gulf had triggered a wave of anxiety: Retail depositors fled to safety in the form of the USD and gold, sending both to record highs on the domestic market. At the same time, carry trade investors headed for the exits in a global risk-off. The combination sent the EGP to a low below 54 to the greenback, but the tide now appears to be turning after strong FX inflows in the past 10 days or so: Portfolio investment is flowing back in, and remittances haven’t yet taken the hit that some had feared.

Offering higher rates on CDs doesn’t just encourage customers to keep their savings in the banking system — it could prompt more folks to de-dollarize. The EGP was trading in a band of 46-47 to the greenback before the war began, raising the obvious question: With the ceasefire now seemingly extended, was 54 the USD’s high-water mark against the EGP?

REMEMBER: The NBE and Banque Misr are the state-owned giants of the industry and together account for c. 50% of all deposits in the banking system. Policymakers have traditionally used the state-owned banks as instruments of monetary policy. Raising rates independent of central bank action provides stability and keeps savers invested in the EGP without requiring policymakers to hike corridor rates and raise the government’s debt burden, banking expert Hany Abou El Fotouh said.

What happens next?

The nation’s biggest state-owned banks usually set the stage for their local peers. We’ll be watching to see whether big local lenders make similar moves in the days to come. Keep a particular eye on our friends at CIB alongside FAB Misr, QNB Al Ahli, and ADIB. While some, like Banque du Caire, have been pushing into lower-cost current and savings account deposits in a bid to reduce their cost of funds, many of the big private-sector banks will face pressure to raise rates on CDs if they want to avoid bleeding deposits.

It’s premature to scream that this signals a rate hike next month: The contours and impact of the US-Iran war have been pretty dynamic, and the CBE’s next policy meeting isn’t until 22 May.

And the CBE may be hesitant to hike rates: Reversing the easing cycle that began just months ago would mean higher debt-service costs for the state, further straining an already strained budget. Fiscal and monetary policy are largely independent, sure, but neither plays out in a vacuum.

Could the push to raise rates on CDs also help keep inflation in check? The USD easing against the EGP means there’s more LCY sloshing around in the system — liquidity that folks might be tempted to park in long-term CDs.

AND- The IMF will be watching closely. It doesn’t love policymakers using side channels to guide policy. Though some will argue that what Banque Misr and National Bank of Egypt have done here makes a good measure of sense, this is the type of thing for which policymakers have been dinged in past Article IV consultations.

BACKGROUND- The CBE chose to leave rates unchanged at its last meeting as the war-triggered energy crisis reversed the disinflationary path we had been on earlier in the year.