How does an increase in interest rates affect credit rates? The bankers respond
Banking experts said the 3% interest rate hike during the last monetary policy meeting will cause companies to borrow more, leading to higher default rates in the future and prompting them to seek other financing or cheaper sources of investment.
They added, in exclusive statements to Al-Mal, that the increase in financing and borrowing costs will be much lower than the trend towards the parallel market to obtain dollars, noting that the ultimate goal is to control the exchange rate as soon as possible and bring the official exchange rate of the pound to the dollar closer. After that, prices stabilize and markets calm down, the exchange rate gradually drops again, and interest rates return to normal, then companies receive loans that pay for the establishment of new production lines.
And the Central Bank approved last Thursday the largest increase in interest rates during 2022, at once by 3 percent, on deposits and loans, at the last session of the Monetary Policy Committee during the current year, to 16.25 percent on deposits and 17.25 percent. % on lending.
For his part, Dr. Ezz El-Din Hassanein, a banking expert, said that raising the interest rate caused an increase in the cost of lending to the state, and thus an increase in the burden of financing the state budget by 170 billion pounds.
Hassanein added, in exclusive statements to “Al-Mal”, that this will cause an increase in the cost of lending to companies, which will lead to an increase in default rates in the near future for medium and small companies. Profitability margins in banks, i.e. increase in liquidity in banks.
Hassanein added that the increase in costs will affect the household sector and bank loans for citizens such as “personal”, “credit cards”, “cars” and others, which may cause an increase in default rates.
The banking expert states that due to protection against the risk of non-payment, be it companies or individuals, banks will encourage banks to start increasing their reserves, which will negatively affect their profitability.
He also stated that the increase in costs will cause an increase in the prices of final products, which will bear the largest part of the increase in lending costs, which contributes to the growth of inflation and thus to the slowdown of economic activity. GDP growth rates may decline in the third quarter of the fiscal year 2022./ in 2023
The banking expert believes that raising the interest rate by 3% at once is its main purpose to achieve an adequate rate of return for investors in foreign debt instruments, seeing fast dollar cash flows that increase the dollar’s cash reserve and support it in its decision to lower the pound and float it completely.
The banking expert explained that the Central Bank and the Ministry of Finance are now resorting to increasing the costs and burden of state financing and reducing domestic investments, in order to control the exchange rate as soon as possible and bring the official exchange rate of the pound against the dollar closer to the parallel market in a period of 3 to 6 months, so that the exchange rate will gradually fall again.
The banking expert confirmed that liquidity in the markets remains high, as cash circulating outside the banking sector is approximately £800 billion and the growth rate of domestic liquidity is 24%, according to the central bank’s statement for the month of August 2022.
dr. Ahmed Metwally, a banking expert, said that whenever the interest rate increases, it leads to an immediate decrease in the demand for borrowing by the banking sector, and an increase in the demand for depositing funds for individuals.
Metwally, during exclusive statements to Al-Mal, added that raising interest rates causes legal entities or companies to wait before taking a loan from the banking sector, which forces them to look for other, cheaper sources of financing or investment, resulting in a slowdown to some extent in economic growth rates. of growth.. Companies that delay the decision to expand expand its impact on the pace of investment.
The banking expert pointed out that the increase in the interest rate has a positive effect on the inflation rate, given that it was 21.5 percent at the end of November last year, because it will be accompanied by citizens’ appetite for deposits and a decrease in liquidity in the bank. market, which will result in a reduction in consumption.
The banking expert explained that the interest rate hikes, which reached 8% during the monetary policy meetings for 2022, are temporary, as happened in 2016, indicating that after the end of the second quarter of 2023, the interest rate curve is expected to once again will fall and then collect.. Companies have borrowing facilities that force them to create new product lines.
Hany Hafez: The cost will be much lower than going to the parallel market to get dollars
Hany Hafez, a banking expert, said that since most of the economy is based on imports, companies in Egypt resorted to the parallel market to get dollars and buy at 3 or 4 times the official market price, causing their costs to rise .
Hafez added, in exclusive statements to Al-Mal, that the increase in the interest rate came to eliminate dollarization, while curbing inflation, to ensure dollar revenues, noting that raising the interest rate will cause an increase in financing and borrowing costs, but by at much lower rates than the trend for the parallel market to gain on the dollar.
Dollarization can be defined as a country that stops using its own national currency due to the loss of its basic function as a means of exchange and store of value, and resorts to using a foreign currency such as the US dollar, Japanese yen, euro or any convertible currency.
And the banking expert continued that there is a possibility that banks will offer savings pods with a slightly higher return, in order to raise the value of the investment on the pound, noting that we witnessed this phase during the exchange rate liberalization in 2016, until interest rates fell again.
The banking expert asserted that what we are witnessing now has an impact in the short term, until conditions stabilize and return to normal levels.
He pointed out that all indicators confirm the necessity of raising the rate of return on funds and savings, even for one year, stating that each bank calculates it according to the price of funds and the capital base.
Hisham Okasha, Chairman of the Board of Directors of the National Bank of Egypt, confirmed that there is no intention of the National Bank and Banque Misr to offer savings certificates with a return of up to 20% in the coming period, after the Central Bank’s decision to increase interest rates.
The banking expert argued that what we are witnessing comes from the supply side, not the demand side, pointing out that if the dollar crisis continues, there are other alternatives to ease the pressure on the currency, by resorting to working in foreign currencies such as the euro and the Russian ruble, which have recently started to work , and it will be reflected on the field, soon we won’t have to raise interest rates anymore.