Yusuf Jamal El-Din | CNBC
The Egyptian central bank raised interest rates by 600 points and devalued the currency, with the Egyptian pound hitting a record low against the US dollar on Wednesday.
The steps are intended to facilitate an agreement with the International Monetary Fund, which is expected to confirm an extension of its current $3 billion financial support program for Egypt.
According to LSEG data, after the news was announced, the Egyptian pound rose to around 50 against the US dollar from around 30.85 previously. The country’s key interest rate is currently 27.25%. The central bank said on Wednesday.
James Swanston, Middle East and North Africa economist at London-based Capital Economics, wrote in a report that the development “suggests policymakers are committed to a return to economic orthodoxy. This is likely to continue in the coming months.” To pave the way for an agreement with the International Monetary Fund within hours”. A research note.
“This appears to be a positive step for Egypt on its path out of the current crisis,” he wrote.
Egypt, the Arab world’s most populous country with about 110 million people, is facing a chronic shortage of foreign currency. The move signals confidence that hard currency inflows are coming, especially the $35 billion investment deal signed last month with the United Arab Emirates and expectations of a further support deal with the International Monetary Fund.
“The domestic economy has recently been weighed down by a shortage of foreign currency, which has led to the existence of a parallel exchange rate market and restricted economic growth,” Egypt’s central bank said in a statement after a special monetary policy committee meeting on Wednesday.
Cairo has previously pledged to allow its currency to trade more freely but still stepped in to rein in the pound when it fell.
“The measures announced are part of a comprehensive set of economic reforms coordinated with the government and have the strong support of multilateral and bilateral partners,” the central bank said. “To prepare for the successful implementation of these measures, sufficient funds have been made available to utilize FX Liquidity.”
Analysts at S&P Global Market Intelligence expect further tightening of monetary policy in 2024 to combat inflation and offset price increases from a weak pound in Egypt. They predict inflation will reach about 30.3% this year, slightly lower than 33.9% in 2023. They expect inflation to fall into the teens by 2025 but only reach single digits by 2027.
Egypt’s Monetary Policy Committee said in comments that it “believes that this tightening policy brings monetary policy to a level that is sufficiently restrictive to anchor inflation expectations and will be maintained for the necessary period of time to achieve the expected deflation process.”
