Egypt's latest interest rates hike: what does it mean?

Doaa A. Moneim, Saturday 2 Sep 2023

The hike that the Central Bank of Egypt (CBE) applied to Egypt’s key interest rates last week could be a sign of further hikes up until the end of 2023 since three further meetings of the CBE’s Monetary Policy Committee (MPC), responsible for deciding on interest rates, have yet to be held.

Inflation
The runaway inflation is the main reason the CBE increased interest rates

 

It could also be an indication that there may be a further devaluation of the Egyptian pound against the US dollar.

In a surprise action, the CBE raised Egypt’s key interest rates last week by one per cent. The overnight deposit rate, overnight lending rate, and the rate of main operations rose to 19.25 per cent, 20.25 per cent and 19.75 per cent, respectively.

The rise has brought the total rise that the CBE has introduced to key interest rates since March 2022 to 11 per cent.

The CBE is now expected to gradually raise interest rates by up to three per cent over the four meetings of the MPC scheduled from August to December in a bid to contain Egypt’s still-high inflation rate, which hit a new record in June.

The increases will also address the high level of local currency liquidity in the market, economist at the UK’s Economist Intelligence Unit Ali Metwalli told Al-Ahram Weekly. The CBE is seeking to fulfil its commitment to the International Monetary Fund (IMF) to bring down inflation to seven per cent through the fiscal year 2025-26, he said.

Egypt’s headline inflation in June recorded 36.8 per cent, compared to 34.8 per cent in May, according to readings published by the Central Agency for Public Mobilisation and Statistics (CAPMAS). This is more than double the inflation rate recorded in June 2022, which stood at 14.7 per cent.

The acceleration in inflation is driven by “broad-based increases in the prices of most of the items making up the Consumer Price Index (CPI),” the CBE said in a statement following the MPC meeting on 3 August.

The CBE has set two targets for Egypt’s inflation rate. The first is seven per cent (± 2 per cent) on average by the fourth quarter of 2024, and the second is five per cent (± 2 per cent) on average by the fourth quarter of 2026.

Raising interest rates gradually is necessary in order to minimise the shock to an already-suffering local market, which is still trying to absorb the 10 per cent hikes that have been applied over the last 16 months, Metwalli said.

The action is also important in tackling the hard-currency parallel market, in which the dollar is trading for over LE40, compared to the official rate of LE31, he added.

The new interest-rate hike and those anticipated over the coming months will contribute to withdrawing local liquidity and downsize the huge difference between the dollar’s official rate and the rates traded in the black market, Metwalli said. 

In a recent report, the US investment bank Goldman Sachs estimated that Egypt needs around $5 billion to balance the official and non-official rates.

Since December, Egypt has been engaged in a $3 billion Extended Fund Facility (EFF) loan deal with the IMF. It has yet to complete the review of the first tranche worth $347 million, as the country has not fulfilled its commitments under the deal.

Key commitments include applying flexible regimes to both the exchange rates and the interest rates, as well as selling off state-owned assets in order to reduce the public-sector footprint in the economy in favour of the private sector.

Prior to the recent MPC meeting, the US Federal Reserve raised its benchmark interest rates by 0.25 per cent, which was followed by similar rate increases by other central banks, particularly in the Arab region.

The interest rate rise by the US Fed is bound to affect the Egyptian market, CEO of Kuwaiti VI Markets, an online trading services company, Ahmed Moati told the Weekly. 

Rate hikes by the Fed cause demand for the dollar to increase, which feeds the US dollar shortage the local market has been suffering from since March 2022. “That’s why Egypt has been suffering from the exit of hot money and a decline in foreign direct investments (FDIs),” he said.

According to Moati, the effect of the CBE’s interest-rate hikes will not be immediately felt in the market, but they will make themselves felt within 18 months. 


* A version of this article appears in print in the 10 August, 2023 edition of Al-Ahram Weekly under the title More rate hikes ahead?

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