- Central bank raises rates 300 basis points, most since 2016
- Middle Eastern nation is facing foreign-exchange crunch
According to Bloomberg article published on December 23, 2022, Egypt hiked interest rates by 300 basis points, the most since 2016, seeking to tackle surging inflation amid expectations of a further devaluation of the pound.
The Monetary Policy Committee raised the deposit rate to 16.25% and the lending rate to 17.25%, it said Thursday in a statement. Although the majority of economists in a Bloomberg survey had predicted an increase, none foresaw the magnitude.
The jumbo hike comes as Egypt faces its worst foreign-exchange crunch in half a decade and the fastest acceleration in inflation in almost five years. Authorities in the Middle East’s most populous country have devalued the local currency twice in 2022, most recently at the end of October, enacting sharp rate rises in both instances.
Hit hard by the economic shockwaves of Russia’s invasion of Ukraine, Egypt has sought crucial aid from allies in the Gulf and turned to the International Monetary Fund to help restore confidence in local assets. The IMF last week approved a $3 billion loan for Egypt, a deal that’s expected to unlock additional financing of about $14 billion from international and regional partners.
A worsening outlook for consumer prices has added urgency. Consumer price rises are already approaching an annual 19% and will likely peak well past 20% next year.
The central bank set a new inflation target of an average of 7%, plus or minus 2 percentage points by the fourth quarter of 2024. The goal for the fourth quarter of 2026 is 5%, plus or minus 2 percentage points.
Much now hinges on the trajectory of the pound. Although authorities announced a shift to a more flexible exchange rate in late October, the currency has only moved in small increments since then. The regulator last hiked interest rates by 300 basis points in November 2016, around the same time it carried out another dramatic devaluation.
In a separate statement Thursday, the central bank warned Egyptian lenders to be vigilant about the potential misuse of local debit and credit cards to secure foreign currency abroad. Following the imposition of new, lower overseas withdrawal limits by some banks, it pointed to the severity of Egypt’s currency crunch.
Another devaluation likely depends on the central bank’s ability to build enough of a liquidity buffer to clear the backlog of requests for hard currency and ensure a stable supply of foreign exchange, according to Farouk Soussa, an economist at Goldman Sachs Group Inc. in London.
