Egypt's Central Bank raised interest rates by 1.5 percentage points on Thursday to combat inflation following a sharp currency devaluation and the adoption of a more flexible exchange rate regime earlier this week.
"In its meeting held on March 17, 2016, the Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, overnight lending rate, and the rate of the CBE's main operation by 150 bps to 10.75 percent, 11.75 percent, and 11.25 percent respectively. The discount rate was also raised by 150 bps to 11.25 percent," the regulator said in a preliminary statement on its website following the meeting.
The CBE explained that its monetary policy "will be geared towards maintaining price stability by avoiding double-digit inflation rates over the medium-term to maintain real incomes,” it said in a press release explaining its decision.
The bank had been widely expected to raise interest rates after it allowed the pound to fall by over 14 percent at a special foreign currency auction on Monday and announced it would adopt a more flexible exchange rate regime amid a stifling foreign currency shortage crisis.
"The move is consistent with inflation targeting as part of the CBE's effective shift to a managed float regime,” Ziad Waleed, economist at Beltone Financial, told Ahram Online.
"The magnitude of the hike is in line with expectations and was necessary to defend the pound following the devaluation move," said Waleed, who predicted an increase of one percentage point or more.
Though the gap between the official and black market rate has reportedly narrowed since the pound was allowed to fall by 14 percent of its value against the dollar on Monday, black market traders surveyed by Reuters cited a rate of EGP 9.4 per dollar on Thursday, against the official rate of 8.78.
The CBE, which sold a total of nearly $1.9 billion to local banks this past week, said the aim was to “eradicate” the black market, CBE governor Tarek Amer told Al-Ahram news agency on Tuesday.
But for sustained results, Egypt needs inflows of foreign currency to pick up after plummeting tourism receipts, falling Suez Canal revenues, and lower than expected foreign investment have caused a foreign currency crunch which has slowed growth and business activity.
The CBE hopes the interest rate hike will wet the appetite of foreign investors now that the burden of a sharp devaluation is out of the way.
"The rate hike will spark an upward rally of the yields on Egypt's short-term treasury bills, making them more attractive to foreign portfolio investors faced with a thin equities market," said Waleed.
Egypt’s two largest state-owned banks have just started offering call options to allow foreign investors in T-bills to hedge against exchange rate risk.
The same banks also previously launched EGP- denominated certificates of deposits with a 15 percent yield in exchange for dollars.