Egypt raising interest rates to curb inflation comes as surprise: Bloomberg

Daily News Egypt
4 Min Read

Bloomberg news agency said that Egypt surprised most economic analysts by implementing the largest increase in interest rates in nearly five years in an attempt to counter the rising inflation and restore the attractiveness of its domestic bonds to foreign investors.

The Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided last Thursday to raise its interest rates on depositing and lending by 200 basis points each to reach 11.25% and 12.25%, respectively.

According to Bloomberg, only one economic analyst correctly predicted the decision in a survey of nine analysts, while most expected an increase of 100 basis points.

Furthermore, the agency indicated that Egypt is the latest emerging economy to take this bold step, given the world’s trend towards tightening monetary policy to curb inflation caused by the war in Ukraine.

The CBE made the decision hours after South Africa also raised its interest rates by the largest margin in more than six years, as did the Central Bank of the Philippines, which decided to raise its key interest rate for the first time since 2018.

“In light of the current trends of monetary policies in the world, the CBE is trying to avoid potential pressures on the EGP,” said Radwa Al-Swaify — Head of Research at Cairo-based Al-Ahly Pharos.

She added that the increase in interest rates “takes into account local consumer price trends” and reduces the size of the negative interest rate adjusted according to the country’s inflation rates.

Bloomberg also indicated that Egypt is racing against time to keep pace with the record rise in grain prices — given it is a major importer of food — after prices increased as a result of the conflict in Europe.

According to the agency, Egypt, which has a high population, used to import most of its wheat from Ukraine and Russia, the latter of which is a major source of income for its tourism industry.

The growth of consumer prices in Egypt recorded its highest level in nearly three years last April due to the war.

Egypt’s announced inflation figures also reflect a devaluation of the EGP by more than 15% on 21 March, the same day the authorities raised interest rates for the first time since 2017 by 100 basis points.

According to Bloomberg, Thursday’s decision also shows an attempt to reduce part of the decline in the inflation-adjusted interest rate in Egypt at a time when global central banks led by the US Federal Bank moved to combat rising prices while increasing lending costs.

It also indicated that the large difference between the interest rate and the inflation rate has recently led to a wave of foreign investment flowing into the domestic debt instruments market.

However, after annual inflation rose to 13.1% in April, interest rates in Egypt turned negative — when adjusted for inflation — for the first time since 2018. It also pointed out that the Egyptian government says that there are outflows of up to $20bn.

Furthermore, the agency noted that the MPC said high annual inflation is “temporarily tolerable” in accordance with the CBE’s previously announced target of 7% (±2%) on average in the fourth quarter (4Q) of 2022, and is expected to decline thereafter, according to the statement.

The statement also said that “the future path of monetary policy rates still depends on inflation expectations, not prevailing inflation rates.”

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