The Central Bank of Egypt raises key interest rates by 2% to counter Russia-Ukraine war repercussions

Doaa A.Moneim , Thursday 19 May 2022

The Central Bank of Egypt (CBE) raised on Thursday key interest rates by two percent (200 basis points) as the government attempts to deal with the negative economic repercussions of the Russian-Ukrainian war and curb inflationary pressures.

Central Bank of Egypt (AFP)
Central Bank of Egypt (AFP)


In a previously scheduled meeting, the Monetary Policy Committee (MPC) of the CBE raised the overnight deposit rate, overnight lending rate, and the rate of the main operation to 11.25 percent, 12.25 percent, and 11.75 percent, respectively. 

The MPC also raised the discount rate by 200 basis points to 11.75 percent.

This is the second time in less than two months for the MPC to raise key interest rates.

On 21 March, the MPC raised key interest rates by one percent - in the first such move since 2017 - as part of the government's attempts to deal with the negative economic repercussions and global inflationary pressures due to the Russian-Ukrainian war.

The MPC attributed its decison today to the slowdown of global economic activity and global inflationary pressures due to ongoing Russian-Ukrainian war. 

“Trade sanctions imposed on Russia and corresponding supply-chain bottlenecks have elevated global commodity prices, such as international prices for oil and wheat, with the latter’s global supply also impacted by adverse weather conditions and poor harvests in select regions,” the MPC said.

The committee added that global financial conditions have tightened, as major central banks have continued to both tighten policy rates and reduce asset purchase programs with the aim of containing increased inflationary concerns in their respective countries.

In addition, recently introduced COVID-19 lockdowns in China have raised concerns about exacerbating existing global supply-chain disruptions.

“Prior to the Russian-Ukrainian war, domestic economic activity continued to expand in 4Q of 2021, recording a preliminary year-on-year growth rate of 8.3 percent, the second highest real GDP growth rate since 3Q of 2002. This was partially supported by the robust growth in tourism, construction and manufacturing, as well as a positive base effect emanating from the low growth rates in the same period in 2020, resulting from the COVID-19 containment measures," the committee explained.

It added that most leading indicators for economic activity have started recently to gradually normalise, and are expected to continue this trend over the near term, as the strong positive base effect diminishes. 

Going forward, the committee expected economic activity to continue to expand, albeit at a slower-than previously projected pace, partially due to the unfavourable spillovers of international developments emanating from the Russian-Ukrainian war.

The MPC also attributed its decision to the annual headline urban inflation that increased to 13.1 percent in April 2022, up from 10.5 percent in March 2022, which was at the highest level since May 2019. 

“In addition, annual core inflation, which excludes volatile food and regulated items, continued its upward trend to record 11.9 percent in April 2022, from 10.1 percent in March 2022, its highest level since April 2018. This increase is attributed mainly to food items and further supported by non-food items,” the committee added.

The depreciation in the Egyptian pound that occurred on 21 March and seasonal patterns as well as the increase in food and fertiliser also drove the rise in inflation hike, according to the MPC.

On 20 March, the Egyptian pound plunged 14 percent to its lowest value in nearly five years against the US dollar, trading at EGP 18.1 for buying and EGP 18.2 for selling, down from EGP 15.6 and EGP 15.7, respectively the night before.

It added that the impact of the Russian-Ukrainian war on the prices of wheat, wheat derivatives, and other food commodities, in addition to the continued seasonal inflationary impact of Ramadan, and the occurrence of multiple holidays during April 2022, increased the prices of the rest of the core food products.

“The MPC decided that raising policy rates is necessary to contain inflationary pressures which is consistent with achieving price stability over the medium term. Monetary policy tools are utilised to anchor inflation expectations, contain demand-side pressures and second-round effects emanating from supply shocks that may lead to deviations from inflation targets,” the committee expounded.

It also expected that the elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s target of seven percent (±2 percent) on average through the end of 2023.

The MPC asserted it will continue to closely monitor all economic developments and will not hesitate to utilise all available tools to achieve its price stability mandate over the medium term.

The Egyptian government seeks to create an attractive atmosphere for the investors in terms of debt instrument investment, also known as hot money, amid the tighter policy the US Fed has started to apply since March to contain the global inflationary wave.

In an international press conference on 15 May, Prime Minister Mostafa Madbouly revealed that hot money outflow from the Egyptian market has been estimated at $20 billion since the beginning of 2022. 

Madbouly asserted that all choices are on the table in terms of the monetary policy to contain the rising inflation as well as address the capital outflows from the Egyptian debt market.

He stressed that the government is ready to cope with any decision by the central bank to raise interest rates.

Madbouly also explained that Egypt has adopted a five-pillar approach to cope with global economic crisis.

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