Egypt: CBE hikes rates at unscheduled meeting

The Central Bank of Egypt hiked its benchmark interest rates in an unscheduled meeting on October 27, just one week ahead of the scheduled November 3 meeting. The overnight deposit rate was raised by 200bps to 13.25%, after the bank had held rates steady at its previous three meetings. The bank’s communique also reitereated the commitment made in recent weeks and months to a ‘more durably flexible exchange rate regime’ and plans to set up a derivatives market to further deepen liquidity. With officials on both sides of the discussions with the IMF over a new programme for Egypt having said over the past two weeks that a new deal was ‘imminent’, the unscheduled move by the CBE could presage a finalisation of the deal over the coming days, especially as the exchange rate issue had been one of the final sticking points according to IMF head Kristalina Georgieva.

CBE hikes 200bps

Source: Bloomberg, Emirates NBD Research

In common with many emerging markets, Egypt’s external position has come under increasing pressure this year as the commodity price spike following Russia’s invasion of Ukraine led to a surge in import costs, while risk-off sentiment and tightening global monetary policy saw large portfolio outflows. Egypt went to the IMF in March, but a deal has not been forthcoming to now, and while the EGP has continued to depreciate steadily since the bigger move in March, it has arguably not kept pace with moves lower by other comparable emerging markets, especially when the static interest rates of the past several months are taken into account. EGP is trading at an all-time low of 19.7239 against the dollar at the time of writing, having lost around 20% ytd.

EGP/USD trending lower

Source: Bloomberg, Emirates NBD Research

The CBE had previously said that it was waiting for an earlier 300bps of hikes to take full effect before moving higher once more, but in its latest missive it stated that ‘the objective of raising policy rates is to anchor inflation expectations and contain demand side pressures, higher broad money growth and second round effects of supply shocks.’ CPI inflation hit 15.0% y/y in September and price growth is becoming increasingly broad-based with almost all components of the basket aside from food registering faster growth than in August.

The bank’s statement also said that the mandated use of letters of credit for import finance will be gradually repealed over the next several months to year-end, which will potentially allow for easier access to dollars. This could provide a boost to private sector activity in the country, with respondents to recent S&P Global PMI surveys noting that difficulties in sourcing materials and parts had held back business. The CBE noted that ‘this will serve as a catalyst for the rejuvenation of economic activity in the medium term.’