Hassan Abdalla, the Governor of the Central Bank of Egypt (CBE) speaks during the press conference on Wednesday 6 March, 2024. Photo courtesy of Egyptian Cabinet.
Abdalla added that raising the interest rates aims to curb the increase in the prices of goods and services and support foreign investment.
The CBE reiterated its commitment to maintaining price stability in the medium term.
Abdalla stated that the CBE will continue efforts to target inflation as the nominal anchor of monetary policy while allowing the exchange rate to be determined according to market mechanisms.
Unifying the exchange rate is a crucial measure as it helps eliminate the accumulation of demand for foreign currency following the closure of the gap between the official and parallel market exchange rates, he said.
Abdalla added that inflation in Egypt has been put on a downward trajectory to achieve the targeted rates.
On Wednesday, the Monetary Policy Committee decided in its extraordinary meeting to raise the deposit and lending rates for overnight and the main operation rate of the Central Bank by 600 basis points to reach 27.25 percent, 28.25 percent, and 27.75 percent, respectively.
Credit and discount rates were raised by 600 basis points to reach 27.75 percent.
As a result of this decision, the Egyptian pound experienced a significant drop on Wednesday, declining by 62 percent to approximately EGP 50.1 against the US dollar and EGP 54.5 against the euro.
Following the announcement of the CBE, Egypt’s government announced that it signed an agreement with the International Monetary Fund (IMF) to extend the current $3 billion loan deal to $8 billion.
Single digit
"We aim to achieve a single-digit inflation rate," Abdalla said on Wednesday evening.
He added that inflation in Egypt has been put on a downward trajectory to achieve the targeted rates.
Unifying the exchange rate is a crucial measure as it helps eliminate the accumulation of demand for foreign currency following the closure of the gap between the official and parallel market exchange rates, he said.
Abdalla stressed: "Having two exchange rates has been a disease suffered by the country, and it was an economic risk that had to be confronted," highlighting the importance of exchange rate unification measures to address price increases.
He added: "We do not target a specific exchange rate," pointing out that the CBE uses monetary policy tools to reduce inflation.
Abdalla added that large quantities of dollars have been pumped into the market through the banking system.
He said forward contracts for currencies have decreased to 30 percent and the insurance rate on dollar bonds reached 25 percent but dropped to 6 percent in conjunction with the new decisions.
Abdullah noted that dollar liquidity would be increased to ensure the availability of goods in the market and support the exchange rate, confirming the presence of significant foreign currency cash flows for the economy.
What to expect
Rami Abul Naja, Deputy Governor of the Central Bank of Egypt for Monetary Stability, stated that the decision taken by the bank today to raise interest rates (by 600 basis points) is a temporary measure.
Abul Naja added that all economies, advanced or emerging, combat inflation by raising interest rates.
He explained that some countries have adopted a different strategy out of fear that it may lead to inflation, adding that the best policy is to use conventional tools such as raising interest rates.
Abul Naja added that the most dangerous thing citizens can face is the erosion of the national currency's value through inflation, emphasizing the need to eliminate this phenomenon soon.
He added that remittances from Egyptians abroad are expected to increase after the decision to unify the exchange rate.
He said market stability contributes to increasing exports, whether goods or services, due to the competitiveness of the local currency, and thus helps in increasing foreign currency inflows.
Abul Naja affirmed that foreign exchange transactions will witness improvement in the future due to exchange rate stability.
He explained that an increase in imports is expected with the resurgence of production activity, leading to a demand for hard currency to import raw materials and production components.
However, he emphasized, the resurgence of production activity would eventually lead to increasing exports.
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