Egypt’s central bank raises interest rates in effort to reduce inflation

The Central Bank of Egypt raised interest rates at its second meeting of the year, a move that was widely expected by analysts after annual inflation rose to a high last month.

The bank’s monetary policy committee increased its overnight deposit rate, overnight lending rate and the rate of the main operation by 200 basis points to 18.25 per cent, 19.25 per cent and 18.75 per cent, respectively. The discount rate was also raised by 200 bps to 18.75 per cent.

Recent inflation developments necessitated “additional tightening in the monetary stance, not only to contain demand side pressures … but also to avoid broad and persistent inflationary effects that could emanate from the supply shocks, with the aim of anchoring inflation expectations”, the committee said on Thursday.

Egypt’s annual inflation rate climbed to 32 per cent last month, up from about 26 per cent in January.

Food prices and core inflation have hit all-time highs, increasing 62 per cent and 40 per cent annually, respectively. The country’s economic troubles have been compounded by Russia’s invasion of Ukraine last February, resulting in supply issues, higher import costs and a foreign currency shortage.

After a series of currency devaluations, the Egyptian pound has lost nearly half of its value against the dollar.

To cushion the impact of inflation on lower-income households, the government plans to increase spending on food subsidies by 20 per cent and fuel subsidies by 24 per cent in its draft budget, which was approved by the cabinet on Wednesday.

The central bank raised interest rates by a cumulative 800bps last year, with the last increase of 300bps in December.

There was speculation before the meeting that the bank would devalue the currency for a fourth time.

The greenback is trading at 35 to 36 pounds on the parallel market, while 12-month non-deliverable forwards are pointing to 40 pounds.

The official rate has held at 30.96 pounds for almost three weeks.

The CBE could be enticed to further weaken the pound due to “challenging FX liquidity dynamics” and the International Monetary Fund’s pending review, Naeem Holding said in a note on Thursday.

The IMF agreed to extend a $3 billion facility to Egypt last year, contingent on the country introducing a flexible foreign exchange policy, carrying out structural reforms and reducing the state’s footprint in the economy.

However, Naeem said the exchange rate could equally be left unchanged for the time being because no additional funds have been secured from abroad, “usually a prelude to a shift in the exchange rate policy”.

Last week, the World Bank approved a new Country Partnership Framework for Egypt that provides the country with $7 billion in funds over the 2023 to 2027 fiscal years.

The agreement aims to boost job creation in the private sector, improve health and education services and strengthen social protection programmes.

Analysts say that Egypt may be tempted to again devalue the pound given the outcome of a pending IMF review