Egypt : Central Bank Of Egypt Hikes Interest Rates By 200 Basis Points Amid Economic Headwinds

  • 01 April 2023 / News / 96 / Admin-23

Egypt : Central Bank Of Egypt Hikes Interest Rates By 200 Basis Points Amid Economic Headwinds

The Central Bank of Egypt (CBE) authorized Thursday an increase of 200 basis points (bps), or 2%, to its key interest rates as the urgency to contain inflationary pressures intensifies amid the devaluation risk of the country’s currency.

Combatting inflation

The central bank’s Monetary Policy Committee (MPC) hiked the overnight deposit rate to 18.25%, the overnight lending rate to 19.25%, and the main operation rate to 18.75%. The bank also raised its discount rate by 2% to 18.75%, according to a statement released Thursday.

The hike aligns with a forecast of an increase of 200-300 bps made by US investment firm Morgan Stanley in a Tuesday report. The firm expected the hike as part of a larger 40 bps increase over the next three months.

At its last meeting in February, the MPC decided to keep interest rates unchanged against forecasts of a 300-bps hike.

Achieving price stability remains a challenge for the Arab country as the accelerated movement of inflation continues. Headline inflation rose to 31.9% year-on-year in February, a sharp rise from 25.8% in January, and well above the CBE's target range of 7% plus or minus 2% for the year. Core inflation has gradually risen since mid-2021, marking a whopping 40.3% in February.

The CBE said in a statement that additional tightening in the monetary stance is on the way, "not only to contain demand side pressures as mentioned above, but also to avoid broad and persistent inflationary effects that could emanate from the supply shocks, with the aim of anchoring inflation expectations," it added.

In a meeting Wednesday, the Egyptian cabinet said it wanted to confine inflation to a 16% rate in fiscal 2024. However, Morgan Stanley expects headline inflation to peak at nearly 38% year-on-year by August-September this year and average 25% year-on-year for fiscal 2023 and 27% for fiscal 2024.

Whether inflation is going the cabinet's way or the analysts' essentially depends on the movement of the exchange rate following the CBE's decision, as well as the foreign exchange liquidity in the economy.

Egypt pledged to adopt a durably flexible exchange rate as part of the International Monetary Fund's (IMF) economic reform program initiated in 2016, aiming to limit inflation expectations by restoring foreign exchange inflows and easing supply shortages.

The North African country took steps in that direction and devalued the Egyptian pound's exchange rate last year and earlier this year. However, they were no panacea for foreign exchange liquidity, as they did not alleviate liquidity issues despite halving the exchange value of the pound against the US dollar, signaling continued misalignment of the real exchange rate, according to Morgan Stanley.

Economic outlook

The Egyptian cabinet targets 4.1% growth in the gross domestic product (GDP) and aims to achieve the highest budget surplus in the North African country's history in its 2023-2024 budget, according to a draft budget approved Wednesday

The projected increase in Egypt's GDP growth falls short of Morgan Stanley's 5% growth expectation in fiscal 2024, which starts in July this year. The cabinet also aims for a surplus of 2.5% of GDP in the 2023-2024 budget, marking the highest in the country's history.

However, these targets face a downside risk from Egypt's medium and long-term debt repayments of public external debt, which are expected to reach nearly $8.1 billion for fiscal 2023 and $7.5 billion for fiscal 2024.

"Large external finance needs still pose important risks to FX and the broader economy amid a weaker level of FX liquidity buffers of banks and the CBE," said Morgan Stanley.

Egypt has been striving to control the economic headwinds due to the fallout from the Ukraine conflict, which includes higher import costs of petroleum and grain. Thus, the cabinet said it would increase its allocation for subsidies of food, petroleum products, exports, medical insurance and drugs, housing, and social security pensions by 20%, 24%, 462.5%, 50.4%, 103.5%, and 24%, respectively, in the fiscal 2024 budget.

Additionally, the cabinet expects to raise its allocation for subsidies and grants by 28.2% next year, compared to 17.1% in this year's budget.

source: forbesmiddleeast