The Central Bank of Egypt (CBE) decided last Thursday to increase its interest rate on lending from 10.25 to 12.25 per cent and on overnight deposits from 9.25 to 11.25 per cent, citing high inflation as the reason for the increases, the second time this year.

Rates have increased this year by a total of three per cent following a one per cent hike in interbank rates on 21 March.

The CBE’s Monetary Policy Committee (MPC) attributed last week’s decision to the current worldwide economic slowdown and the war in Ukraine, which has affected global supply chains and led to increases in the prices of commodities.

Raising interest rates will attract money from depositors, leading to a reduction in financial liquidity in the market and thus limiting demand as a means to control prices. The higher rates also increase the cost of credit for investors.  

The decision was triggered by the faster-than-expected increases in prices in April, said Radwa Al-Swaify, head of research at the Al-Ahly Pharos investment bank.

Egypt’s annual consumer price inflation recorded 14.9 per cent in April, compared to 4.4 per cent in the same month last year. Urban inflation has also surged to reach its highest level since May 2019, reaching 13.1 per cent in April compared to 10.5 per cent in March.

Al-Swaify said in a press statement that April’s inflation figures were two per cent higher than most expectations in the market. “Rapid rises in the prices of goods have begun to be recorded, requiring a quick move to raise interest rates to withdraw the secondary effects of inflation,” she said.

She added that one of the reasons behind the hike in interest rates was to keep pace with rates in similar emerging markets, which are also witnessing increases. Raising interest rates can avoid pressure on the local currency, she explained, especially since the dollar exchange rate against the Egyptian pound is now at around a fair value.

Al-Swaify expected that any further rate hike during upcoming CBE meetings would be linked to inflation figures over the next few months, adding that inflation is expected to reach its peak in August, at about 15-16 per cent, compared to the 13 per cent recorded in April.

The MPC statement attributed the April inflation figures to price increases of food and some other non-food items. “While both were affected by the devaluation of the Egyptian pound that occurred on the 21 March and seasonal patterns, several other factors have contributed to the increase in food prices, including adverse weather conditions and high fertiliser prices,” the statement said.

The MPC also referred to 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 the month of Ramadan, leading to an increase in the prices of other core food products.

This is in addition to the recently introduced Covid-19 lockdowns in China, which have raised concerns about exacerbating existing global supply-chain disruptions, the MPC statement said.

A research unit at Beltone Financial Holding said that in the light of the rise in food commodity prices on a monthly basis, coinciding with the increases in commodity and fuel prices globally, the CBE had had to raise interest rates.

It said that there was a need to maintain the attractiveness of investment in the fixed-income market, especially with high interest rates globally, as well as with the high inflation rates that put pressure on liquidity flows to emerging markets.

The National Bank of Egypt and Banque Misr have announced that they do not intend to offer further high-return savings certificates of more than 18 per cent, as these have already successfully yielded more than LE700 billion since they were introduced in March.

*A version of this article appears in print in the 26 May, 2022 edition of Al-Ahram Weekly.