Egypt’s central bank raises key interest rates by 300 bps

Egypt’s central bank hiked overnight interest rates by a greater-than-expected 300 basis points, warning that inflationary pressures were building.

The rate hike may signal the central bank may be preparing for a further weakening of the currency.

The bank’s Monetary Policy Committee (MPC) raised the deposit rate to 16.25 per cent and its lending rate to 17.25 per cent, it said in a statement.

“The MPC judges that demand side pressures have recently increased,” it said, citing activity greater than the economy’s capacity, higher inflation numbers and faster growth of money supply.

A poll of 12 analysts had forecast the bank would raise rates by a median 200 bps.

The central bank most recently raised rates by 200 bps at a surprise meeting on Oct. 27, the same day it devalued its currency by 14.5 per cent and announced it had signed a $3 billion financial support package with the International Monetary Fund.

“The objective of raising policy rates is to anchor inflation expectations and contain demand side pressures, higher broad money growth and second round effects of supply shocks,” the MPC statement added.

Since the October raise hike, Egypt has come under renewed pressure to raise interest rates and weaken its currency after the gap between the official price of the currency and the black market continued to widen.

“I think Egypt will implement a further depreciation before 1 January,” said Jaap Meijer, an analyst with Arqaam Capital. “A rate hike will make this easier now to ensure some capital inflows once the devaluation is implemented.”

The central bank raised interest rates hours before both of its two big devaluations this year, one in March and the other in October. The currency market is now closed for the weekend and will not reopen until Sunday morning.

Egypt’s annual urban consumer inflation quickened to a five-year high of 18.7 per cent in November from 16.2 per cent in October. Core inflation to accelerated 21.5 per cent from 19.0 per cent in October.

The central bank has an inflation target of between 5 per cent and 9 per cent for the fourth quarter of 2024, the statement said.

The World Bank’s executive board has approved $500 million in development financing for Egypt to expand its social safety net and protection programme in the face of global economic pressures filtering through to the country’s economy, the international cooperation minister said on Friday.

The funds will support the government’s Takaful and Karama conditional and unconditional cash transfer programme, first launched in 2015, which targets low-income Egyptians eligible for government support.

The network has already received $900 million in funds since its launch in 2015 and helps around 12.8 million people in the Arab world’s most populous country.

Meanwhile last week the International Monetary Fund (IMF) has approved a deal that will provide a $3 billion support package to Egypt over a period of almost four years, with the agreement expected to draw in additional $14 billion in financing for the Middle East country.

The announcement from the IMF’s executive board late on Friday comes after a preliminary agreement was reached in October between Egypt and the Fund, hours after Egypt’s central bank introduced a series of reforms, including a hike in key interest rates by roughly 2 percentage points.

The deal announced on Friday – known as an Extended Fund Facility Arrangement – is expected to cover a period of 46 months and will give the Egyptian government immediate access to about $347 million, which will help the debt-ridden economy nation bolster its balance of payments and budget, the IMF said.

The statement said the package is expected “to catalyse additional financing of about $14 billion from Egypt’s international and regional partners.”

According to the IMF, the package will introduce wide-sweeping economic reforms, including a “durable shift to a flexible exchange rate regime” and a “monetary policy aimed at gradually reducing inflation.”

It also envisages structural changes to the Egyptian economy to rebalance “the playing field” between the state and private sector, IMF said.

The new IMF financial support package for Egypt aims to reduce government debt to less than 80 per cent of the gross domestic product (GDP) in the medium term, a Cabinet report released on Saturday said.

The Fund didn’t require the Egyptian government to cut spending on subsidies, the report said, adding the new programme aims to strengthen the social protection network for citizens.