Why did the central bank suddenly decide to withdraw all this liquidity from the banks? Can this step really reduce inflation? Are there other dimensions that are not clear to us? Where does the money withdrawn go? What are the other moves to control inflation?
Recently, within just one week, the Central Bank decided to withdraw liquidity in an unprecedented amount, reaching 1.37 trillion in a matter of days. It also withdrew another 792 billion pounds, with an interest rate of 27.75%. Huge numbers, right? But the question is: Why? Can these decisions actually protect us from inflation or leave us in a closed circle?
The truth is that the answer is complex, but let us understand it simply. Liquidity in the Egyptian market has increased significantly due to what is known as “hot money.”
What is hot money? Why is the central bank forced to deal with it in this way?
Hot money is short-term investments in dollars that foreign investors enter to benefit from high interest rates, but they can withdraw the money at any moment. The problem here is that its presence creates excess liquidity in the pound, and this is what increases inflation rates.
Ok, what does the central bank do?
It uses two main mechanisms to withdraw liquidity. The first is a weekly bid for 7 days with a fixed interest, and the second is a monthly bid for 28 days with a variable interest.
Since last April, he began accepting all banks’ requests instead of setting a quota for each bank. The goal is to absorb as much liquidity as possible from the market.
According to a number of economists, the main goal of withdrawing liquidity is to “dry up the source,” meaning to stop pumping more pounds that have no cover, and this leads to reducing the money supply and thus curbing inflation.
But is this enough?
Although inflation in Egypt reached alarming numbers of 26.5% in October on an annual basis, the Central Bank aims to reduce it to 15%. That’s why the weekly bids continue, encouraging people to save in banks with higher interest.
These tenders represent an opportunity for banks because they are not subject to taxes like treasury bills. This makes them a preferred tool for banks to invest their money.
In the end, all of these steps aim to create economic stability, even though they put pressure on banks and customers as well. The question that arises is: Will we be able to reach the target and achieve balance in the market? .. The coming days and the movements of the Central Bank are what will decide the answer to the questions that are running through our minds.
