A recent report revealed that the Central Bank of Egypt may have to raise interest rates by up to 300 basis points when it meets later this month, after inflation in February far exceeded expectations.
During the first meeting of the Monetary Policy Committee in 2023, it decided to maintain the deposit and lending returns rates for one night, as well as the price of the main operation of the Central Bank, at the levels of 16.25%, 17.25%, and 16.75%, respectively. It also kept the credit and discount rates at 16.75%.
In terms of inflation, the Central Bank of Egypt had revealed that the annual rate of core inflation recorded 40.3% in February 2023, compared to 31.2% in January.
He explained, according to a statement, that the basic consumer price index, prepared by the Central Bank, amounted to a monthly rate of 8.1% in February 2023, compared to a monthly rate of 1.2% in the same month of the previous year, and a monthly rate of 6.3% in January 2023.
Data from the Egyptian Mobilization and Statistics Authority showed that the annual consumer price inflation in Egypt’s cities rose to 31.9% in February from 25.8% in January. The general consumer price index for the whole Republic reached 161.3 points for February 2023, recording an increase of 7.1% compared to January 2023.
According to Goldman Sachs, an interest rate hike of this magnitude was a recent precedent in Egypt, as it also had to devalue its currency several times over the past year.
In December, the central bank raised its benchmark deposit rate by 300 basis points – the highest rate since 2016 – to 16.25%, but has kept it there since.
Goldman Sachs economist Farouk Sousse revealed that containing inflation expectations and, in particular, improving domestic liquidity in foreign currencies to relieve chronic pressure on the Egyptian pound, will require the Central Bank of Egypt to pursue a stricter monetary policy in the coming months.
Prior to that, Goldman Sachs did not rule out an unscheduled increase in interest rates in response to pressure on inflation and the pound.
After the latest inflation data, economists at Naeem Brokerage said an “emergency meeting” could precede an increase of about 200 to 300 basis points.
The report indicated that inflation-adjusted interest rates in Egypt are turning negative, and escalating price gains have pushed real interest rates in Egypt below zero.
The fastest rise in inflation in more than five years has turned Egypt’s official borrowing costs very negative when adjusted for inflation.
The real rate that was once the world’s highest is now nearly minus 16%, one of the lowest among more than 50 major economies tracked by Bloomberg.
“The risk of further weakness in the pound in the near term is high, especially in the context of the first review under the IMF programme, which is scheduled for this month,” Soussa said.
In light of the current circumstances, many options may not be available to the central bank in light of the shortage of dollars in the money market and the rise in inflation rates to unexpected levels.
In its latest statement, the Monetary Policy Committee indicated the persistence of inflationary pressures on the demand side, which was reflected in the development of real economic activity compared to its maximum production capacity and the impact of exchange rate fluctuations in the recent period.
She explained that the CBE’s proactive policy aims to control inflationary pressures and reduce inflation expectations to the target level of 7% (+/- 2%) on average during the fourth quarter of 2024.