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Egypt Monetary Policy March 2022

Egypt: Central Bank delivers first rate hike since July 2017 at special meeting in March

On 21 March, the Central Bank of Egypt (CBE) held a special monetary policy committee meeting, originally scheduled for 24 March. The CBE delivered its first rate hike since July 2017 and increased its key policy rates by 100 basis points each, bringing the overnight deposit, the overnight lending and main operations rates to 9.25%, 10.25% and 9.75%, respectively—back to their August 2020 levels. Moreover, the CBE also let the Egyptian pound depreciate significantly.

The Bank’s decision was driven by the recent increase in both headline and core inflation, despite remaining within the 5.0–9.0% target band in recent months. That said, recent global developments—including the economic recovery from the pandemic, the outbreak of the Russia-Ukraine war and supply chains being upended in recent weeks amid China’s Covid-19 lockdown—have led to a surge in commodity prices and pushed up inflationary pressures. With its move, the Bank aims to rein in inflation and anchor inflation expectations, as well as to contain second-round effects due to supply shocks that lay outside the scope of the Bank’s policy tools. The CBE also highlighted the “importance of the exchange rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness.” In line with this, the bank allowed the pound to weaken markedly with the aim of preserving macroeconomic stability.

With regard to forward guidance, the Bank did not provide hints on future policy moves, but reiterated that “the path of future policy rates remains a function of inflation expectations, rather than of prevailing inflation rates” and added that it “will continue to closely monitor all economic developments and will not hesitate to utilize all available tools to achieve its price stability mandate over the medium term”. Our panelists are currently assessing the CBE’s latest move.

Farouk Soussa, economist at Goldman Sachs, explained:

“The Central Bank of Egypt […] allowed the EGP to depreciate by 10.0%, from 15.7 per USD to 17.5 per USD. The move is contrary to our expectations of a smaller depreciation in the Egyptian pound, and a 50 basis point hike later in the week. It comes as the Egyptian authorities are in talks with the IMF regarding a new program, and against a backdrop of heightened inflationary pressures and external imbalances that have been significantly exacerbated by the fallout from the conflict in Ukraine. The most acute of these has been the outflow of foreign portfolio investments from the local debt market.”

The next monetary policy meeting is set for 19 May.

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