Interest rate rise cause capital pass from companies to banks

The attention of stakeholders and citizens is directed to the outcome of the Central Bank of Egypt's meeting of the Monetary Policy Committee Thursday, February 1, 2024

Amr Farag - • General Topics

Whereas, the result of the previous meeting on December 21, 2023 was to maintain the overnight deposit and lending rates and the main operation rate of the Central Bank at the levels of 19.25%, 20.25% and 19.75%, respectively. The credit and discount rate was maintained at 19.75%. As a result of the slowdown in the economy at the global and domestic levels, the monetary restrictive policies pursued by the major central banks contributed to lowering both expectations for economic growth.

At the global level, with the continuation of global economic tensions as a result of the Ukrainian war and the events in Gaza, uncertainty about inflation expectations, especially with regard to global oil prices, continues as a result of the geopolitical changes that the world is currently witnessing.

At the local level, inflation rates continue to increase in an unprecedented manner and raise prices as a result of a gap between the official rate of foreign currencies and the exchange rate of the parallel market, and the cessation of some factories from production as a result of the lack of ability to import raw materials required in the production process

We expect to continue to keep interest rates unchanged as a result of deflation policies in local investments, which may have many advantages, including encouraging citizens to establish projects and local investment to try to fill the gap with local products as an alternative to imports, which directly affects reducing unemployment rates and operating production chains associated with employment and local direct investment.

The impact of interest on individuals and companies:

First, the impact of raising the interest rate on individuals

When raising the interest rate, deposit holders tend to turn to banks to invest their money in banking products such as deposits - investment certificates in order to achieve benefits called "risk-free return on investment", which is the lowest return obtained, and this leads to not investing money in the right path for it, which is its entry into the wheel of real investment and contributing to achieving added value to the market and establishing projects that serve the Egyptian economy

Second: The impact of the interest rate on companies and institutions

Interest rates vary for companies in terms of the abundance of liquidity in companies, companies with liquidity when interest rates increase tend to increase their deposits in banks to obtain interest on deposits But most of the time companies borrow from banks, when interest rates increase, the cost of borrowing is higher and the companies' profits are affected by the increase in interest rates, which greatly affects the increase in prices to compensate for the increase in the cost of borrowing, which directly affects the consumer by increasing the prices of goods and services and increasing inflation

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