Egyptian interest rates nearing a 30-year high

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• Analysts predict rates could soon exceed 20%
• Recent worst-ever bond sale subscribed by just 0.04%
• Investors don’t believe Central Bank can prevent further devaluations

Interest rates in Egypt could soon reach a 30-year high, according to economists, amid fears that core inflation, already at a record 40.3 percent, will rise further. 

Last week, the Central Bank of Egypt (CBE) increased its overnight deposit rate and lending rate by 200 basis points (bps) to 18.25 percent and 19.25 percent respectively.

But many analysts had been expecting a greater increase and now predict that the bank will soon be forced to raise rates above 20 percent for the first time since 1991. 

In a note following the CBE’s announcement, London-based Capital Economics said that it expected interest rates will be increased by a further 200 bps, which would take the overnight deposit rate to 20.25 percent in the coming months.

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“Policy is then likely to be left on hold well into 2023 as inflation slows back within the CBE’s target range toward the second half of next year,” the economic research firm wrote.

Before last week’s announcement many analysts had been speculating that rates should have been increased in line with the Egyptian pound’s devaluation against the dollar in January.

On 27 March, a Reuters poll of 15 analysts found that seven predicted that the CBE would increase rates by 300 bps.

Since then, analysts believe that the CBE has hinted at further rate increases.

They point to a line in the bank’s statement last week that reads: “Recent developments necessitate additional tightening in the monetary stance, not only to contain demand side pressures, but also to avoid broad and persistent inflationary effects that could emanate from the supply shocks, with the aim of anchoring inflation expectations.”

“It’s a line we’ve never had before”, said Mena economist James Swanston at Capital Economics. “We think it is a pretty clear indication that they think rates are going to rise even higher.”

The CBE is also under pressure to reassure investors of its commitment to suppress inflation amid widespread concerns of another devaluation. In a bond sale on Monday, Egypt managed to sell only 0.04 percent of the three-year securities it put up for auction, raising just EGP1.09 million ($35,275). 

According to data compiled by Bloomberg, this was the lowest amount it has ever raised in a domestic sale of notes and an apparent indication by the market of its lack of faith in the CBE’s ability to prevent further devaluations.

There have long been concerns over Egypt’s reliance on ‘hot money’. The so-called carry trade – selling a low interest rate currency to invest in or purchase a high rate one – saw international funds investing in Egyptian debt instruments and benefiting from the high interest rates on offer.

But many have been deterred by fears of further currency devaluation. 

Swanston is among analysts who said that, in the long run, the country must introduce a more flexible exchange rate and more privatisation of its economy to attract stable, long-term investors “which will go some way to reducing dependence on more flighty, hot money in-flows”.

“Continuing to raise interest rates further will restore investor confidence in its commitment to tame inflation,” Swanston added.

“But there are still questions about the appetite of foreign investors to come back to Egypt.”