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Egypt’s central bank ups interest rates amid inflation worries

City, Street, Urban Reuters/Mohamed Abd El Ghany
Egypt's annual urban consumer inflation quickened to a five-year high of 18.7% in November 2022

Egypt’s central bank hiked overnight interest rates by a greater-than-expected 300 basis points (bps) on Thursday, warning that inflationary pressures were building.

The rate hike may signal the central bank may be preparing for a further weakening of the currency.

The bank’s Monetary Policy Committee (MPC) raised the deposit rate to 16.25 percent and its lending rate to 17.25 percent, it said in a statement.

“The MPC judges that demand side pressures have recently increased,” it said, citing activity greater than the economy’s capacity, higher inflation numbers and faster growth of money supply.

A poll of 12 analysts had forecast the bank would raise rates by a median 200 bps.

The central bank most recently raised rates by 200 bps at a surprise meeting on October 27, the same day it devalued its currency by 14.5 percent and announced it had signed a $3 billion financial support package with the International Monetary Fund (IMF).

“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,” the MPC statement added.

Since the October raise hike, Egypt has come under renewed pressure to raise interest rates and weaken its currency after the gap between the official price of the currency and the black market continued to widen.

“I think Egypt will implement a further depreciation before January 1,” said Jaap Meijer, an analyst with Arqaam Capital. “A rate hike will make this easier now to ensure some capital inflows once the devaluation is implemented.”

The central bank raised interest rates hours before both of its two big devaluations this year, one in March and the other in October. The currency market is now closed for the weekend and will not reopen until Sunday morning.

Egypt’s annual urban consumer inflation quickened to a five-year high of 18.7 percent in November from 16.2 percent in October. Core inflation accelerated to 21.5 percent from 19.0 percent in October.

The central bank has an inflation target of between five and nine percent for the fourth quarter of 2024, the statement said.