Egypt Hikes Interest Rates and Lets Pound Fall to Absorb Shocks

The central bank raised the deposit and lending rates by 100 basis points each to 9.25% and 10.25% respectively, the Monetary Policy Committee said Monday. A combination of soaring commodity and energy prices and a wave of global monetary tightening have added strain to the economy of Egypt, one of the Middle East’s most indebted nations. 

The pound weakened markedly after holding steady for about two years, according to data compiled by Bloomberg. 

“Being keen on safeguarding the achieved macroeconomic stability, the Central Bank of Egypt stresses on the importance of the exchange rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness,” policy makers said in a statement. 

“Rising international commodity prices resulting from further supply chain disruptions in addition to increased risk-off sentiment have added to domestic inflationary pressures as well as external imbalances,” it said. The MPC had been due to meet on March 24.

Bloomberg News reported last week Egypt was in talks with the International Monetary Fund on possible support that could include a loan, as shockwaves from Russia’s invasion of Ukraine add pressure to its economy. A crippling dollar shortage in Egypt prompted a currency devaluation and sweeping reforms in 2016 that were backed by a $12 billion IMF program. 

The central bank’s move will increase the likelihood of a new IMF program being agreed in the coming weeks, Daniel Richards, MENA Economist at Emirates NBD wrote in a note. This is because “some of the likely prerequisites of renewed financial support from the Fund – a meaningful rate hike and a cheaper currency – have already now been met.” He predicted further rate hikes of 200 basis points in total this year, echoing other economists who see further tightening on the cards.

Fitch Ratings last week said Russia’s invasion of Ukraine will cause “reduced tourism inflows, higher food prices and greater financing challenges” for Egypt, the Arab world’s most populous nation. Inflation in urban parts of Egypt reached 8.8% in February, its highest level since mid-2019, prompting expectations of a rate hike. 

After the move, Banque Misr, National Bank of Egypt decided to offer a one-year certificate to individuals with an interest rate of 18%, Banque Misr Chairman Mohamed Eletreby said by phone.

Egypt also set prices for unsubsidized bread to avoid price gouging, a cabinet statement said on Monday. Russia’s invasion of Ukraine has sent global wheat prices soaring and Egypt relies on the two countries for most of its supply. 

Monday’s move is good for the pound and Egyptian economy in general, Allan Sandeep, director of research at Naeem Brokerage said in a note. “For the short term, however, inflation is likely to hit double digit levels.” 

Around 6.6% of Egypt’s exports go to Ukraine and Russia, while the two countries previously made up about a third of all tourism arrivals. The crisis will also aggravate Egypt’s vulnerability to foreigners selling bonds, Fitch Ratings said.

As a proportion of gross domestic product, Egypt’s financing requirements for 2022 are in line with peers at around 4%, according to Morgan Stanley. “However, looking at these values in nominal terms reveals the gravity of the challenge it faces,” the bank said in a March 10 research note. 

Egypt’s external needs are $18.6 billion, markedly high relative to the $5 billion across peers, it added.

The risk premium on Egypt’s debt hit a record 1040 basis points this month, according to a JPMorgan Chase & Co. index. 

“The decisions taken by the CBE are bold, and in the right direction,” said Radwa El-Swaify, head of research at Cairo-based Al Ahly Pharos, adding that prolonged pressure on foreign currency inflows and a sustained spike in global commodities remain key risks for the Egyptian economy going forward.