Egypt: Central Bank holds emergency meeting and delivers a 200 basis point hike in October
On 27 October, the Central Bank of Egypt (CBE) held an out-of-schedule emergency monetary policy meeting. The CBE brought forward its scheduled 3 November meeting and delivered a surprise 200 basis point increase. As a result, the overnight deposit, the overnight lending and the main operations rates were brought to 13.25%, 14.25% and 13.75%, respectively. The sharp increase marked the resumption of the tightening cycle after the Bank stayed put in three consecutive meetings, and brought the cumulative increases to 500 basis points since March 2022. The Banks decision to hike rates was motivated by the desire to anchor inflation expectations and to contain demand side pressures; the CBE sees headline inflation above the upper bound of its 5.0–9.0% target band in Q4 2022.
In the same meeting, the CBE announced its shift to a fully flexible exchange rate regime, in which markets will now determine the price of the Egyptian pound. The move was a requirement to secure the long-awaited and much-needed deal with the IMF; it should also boost Egypts competitiveness and shore up investor sentiment in the long term, attracting back foreign direct investment. Shortly after, a USD 3 billion, 46-month agreement with the Fund was announced. Egyptian authorities also requested additional financing under the Resilience and Sustainability Facility; this could unlock a further USD 1 billion.
Following the announcement of the new flexible exchange regime, the pound plunged 15.8% month on month on 27 October and traded at a record low of EGP 23.2 per USD. This weakening of the pound follows Marchs over 14% depreciation in a similar move to try and secure the deal with the IMF. Consequently, the pound has plunged over 32% so far this year.
The CBE did not provide explicit guidance regarding future policy moves. It stated, however, that it will “closely monitor all economic developments and will not hesitate to act in order to ensure price stability.”
Farouk Soussa, analyst at Goldman Sachs, commented:
“The devaluation is likely to add to inflationary pressures in the near term, although we maintain our view that these will be transient. […] Given the transient nature of the inflationary shock and the inflation trajectory, we do not anticipate further rate hikes by the CBE at this stage […] That said, global uncertainties remain high and the possibility of further FX weakening in the near term mean risks to rates remain to the upside”.
The next scheduled monetary policy meeting is set for 22 December.