Soaring inflation prompts Egyptian Central Bank to raise interest rates

The Central Bank of Egypt is responding to the consequences of the war in Ukraine. The surge in inflation prompted the Monetary Policy Committee, meeting in extraordinary session, to raise its key rates on Monday for the first time since July 2017. The interest rate on deposits and the refinancing rate thus increased by 1 point percentage, reaching 9.25% and 10.25% respectively.

Most economists expect further monetary tightening this year. What weaken the country. Egypt is one of the most indebted countries in the Middle East. Fitch said last week that Russia’s invasion of Ukraine would lead to “reduced tourist flows, higher food prices and greater funding problems” for the country.

Inflationary push

The central bank justified its decision by the inflationary surge linked to the end of the Covid-19 crisis and the disruption caused by the Russian invasion of Ukraine. “Rising global commodity prices resulting from supply chain disruptions, along with heightened feelings of risk aversion, have aggravated internal inflationary pressures as well as external imbalances,” she wrote in a statement. .

Inflation in cities had already reached 8% in February, the highest rate in three years, and 10% in rural areas. The trend has continued in recent weeks. Egypt is very dependent on its imports, in particular wheat, which came before the start of the conflict at 61% from Russia and 23% from Ukraine. The price of unsubsidized “baladi” (local) bread, which the government has just decided to cap, has increased by 50% since the beginning of hostilities.

Preserving Egyptian competitiveness

The Central Bank of Egypt has also decided to let its currency depreciate, in order to “preserve Egyptian competitiveness”. The Egyptian pound, which had been relatively stable against the dollar for two years, fell 14%. The exchange rate exceeded Monday evening 18 pounds for one dollar.

Despite the official liberalization of the exchange rate in 2016, as part of the IMF’s structural adjustment program, the parity had de facto been maintained in recent years at 15.70 pounds per dollar thanks to the contribution of banks trade to support the local currency. The Egyptians fear, however, that the fall of the currency contributes to further increase inflation.

At a time when Egypt is again unofficially engaged in discussions with the IMF with a view to obtaining a potential assistance programme, the depreciation of the pound could work in its favour. The liberalization of the exchange rate has been demanded for several years by the IMF, but had never really been implemented by the country.

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