Egypt hikes interest rate and lets the pound down after economic shockwaves

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Today, the Monetary Policy Committee of the Central Bank of Egypt decided to raise interest rates by 1% on both deposit and lending to be 9.25% and 10.25% respectively. The Committee issued a statement to explain the belief of the Central Bank in the importance of exchange rates flexibility. It’s considered as an indication for the banks to move the Egyptian Pound against the US Dollar which was noted by the banks at the beginning of today’s morning transactions which led to the fall of the pound to be EGP 18.28 (on rising trend) against the American dollar, which is nearly 11%. This drop comes after six years in which the Central Bank of Egypt kept the pound value fixed despite liberalizing the exchange rate since 2016.

The move comes as an attempt to consume the huge inflation wave that hit across the world because of the Covid-19 pandemic and the concerns raised by the Russian invasion of Ukraine which led to a huge US Dollar pull-out wave by the Egyptian Debts’ investors. The statement mentioned that recently the global inflationary pressures raised again after the global economic recovery signs by the instability caused by the COVID-19 crisis because of the escalation of the Russian-Ukrainian conflict. The risks related to the global economy increased after this conflict, which represented in the rising of the international commodity prices, the supply chain disruptions, the increase of shipping costs, and the instability in the emerging financial markets which led to domestic inflationary pressures as well as external imbalances.”

From her side, Mona Bedir, Senior Economist at Prime Holding, said that the Central Bank of Egypt has issued an unexpected decision of huge liberation for the Egyptian Pound’s exchange rate suddenly will probably to a great increase for inflation rates. Bedir thinks that the Central Bank will probably resort to continuous interest rate increase against such inflation at 400 points over 2022 compared with 300 points which was the maximum limit of expectations before today’s decisions.

The inflation in Egypt is linked to the Egyptian pound value before the foreign currencies due to the huge influences on import prices considering the big deficit of the balance of trade.