Egypt interest rate rise: Can new CBE governor hold nerve with looser approach as inflation surges?
The national bank of Egypt raised interest rates by 200 basis points last week in an unscheduled meeting, aiming to bring down inflation and move its monetary policy in line with the International Monetary Fund (IMF)’s requirements for a lending facility.
The bank also adopted a flexible exchange rate policy as part of the negotiations, sending the Egyptian pound (EGP) to fresh lows against the US dollar (USD), despite the interest rate increase. That followed a currency devaluation in March.
What are the key factors driving the Egypt interest rate rise and what is the outlook for rates into 2023 and beyond under the new acting CBE governor Hassan Abdalla appointed in August?
Egyptian interest rate policy
Interest rates refer to the amount of money a lender charges a borrower for a loan, expressed as a percentage of the loan.
A country’s interest rate policy is set by its central bank, which is typically mandated with maintaining stability in the financial system. Raising interest rates makes it more expensive for individuals and businesses to borrow money on credit and decelerates economic growth, whereas cutting interest rates makes borrowing cheaper, encouraging spending and investment.
Central banks set interest rates to direct the rates banks charge each other and their customers. They set various policy rates including overnight deposit, lending and discount rates, with a benchmark reference rate for banks and the broader markets to follow. Central banks use interest rates as a tool to control the rate of price inflation, which can cause instability if it becomes too volatile.
In Egypt, the Central Bank of Egypt (CBE) implements the country’s monetary policy. The official benchmark bank interest rate in Egypt is the overnight deposit rate. The bank’s target inflation rate is currently 7%, up from 6% last year.
According to the law entrusting the CBE with Egypt’s monetary policy: “The CBE is committed to achieving, over the medium term, low rates of inflation which it believes are essential for maintaining confidence and for sustaining high rates of investment and economic growth.”
The CBE’s nine-member Monetary Policy Committee (MPC) makes monetary policy decisions in monthly meetings. The CBE uses an overnight lending facility and an overnight deposit facility as its main policy instruments to manage the overnight interbank rate.
Egyptian interest rates remain volatile
Unlike some countries that have maintained historically low interest rates since the 2008 financial crisis, Egyptian interest rates have been volatile as the country has introduced fiscal policy reforms. Allowing the Egyptian pound to float freely against other currencies in 2016 resulted in high inflation as the cost of imports rose, and the CBE lifted the overnight deposit rate to 18.75% in late 2017 with inflation soaring from 10% to 33%.
The benchmark Central Bank of Egypt interest rate was cut to 8.25% in November 2020 to stimulate the economy, after annual core inflation dropped below its target to 3.4%. Rates remained stable until March 2022, when the CBE began its current hiking cycle with a 100-basis point increase, citing global inflationary pressures from the Covid-19 pandemic, the Russia-Ukraine war and rising commodity prices. The CBE raised rates by another 200 basis points in May.
The central bank raised rates again in October for the first time in five months with its 200 bps hike, brought forward from its scheduled November meeting. That brought rates up by an unprecedented total of 5% since the start of the Russia-Ukraine war and put the key rate at 13.25%, the highest interest rate in Egypt since 2020. The MPC stated:
Headline inflation climbed to 15% in September, its highest level since November 2018, according to CBE data. In addition to raising interest rates and floating the currency, the government raised the minimum wage for public employees to meet the higher cost of living and froze household electricity prices until June 2023.
Egypt adjusts policy for IMF deal
Egypt’s economy is facing pressures from several directions, including the rising inflation rate, the Russia-Ukraine war, a drop in tourism revenues, food insecurity, including low foreign currency reserves and high interest payments.
The Egyptian government is tasked with curbing inflation, reducing the country’s reliance on imports, boosting exports from local production, attracting foreign investment following high capital outflows and increasing foreign exchange reserves.
There has not been agreement l the government on how to proceed, with President Abdel-Fattah al-Sisi unexpectedly replacing CBE governor Tarek Amer with acting head Hassan Abdalla in August – a year ahead of the end of Amer’s term – following differences between the government’s fiscal policy and the central bank’s monetary policy.
In March, the government began negotiations with the IMF and on 27 October the IMF announced they had reached a staff-level agreement on a three-year, $3bn Extended Fund Facility (EFF) Arrangement. The arrangement is part of a larger $5bn package that includes financing from other countries in the Middle East. The IMF stated:
The CBE’s MPC is scheduled to meet next on 22 December, having cancelled its 3 November meeting. Meanwhile, the IMF officials have praised the most recent 200 bps rate hike by the Egyptian central bank.
"The measures that the central bank took last week in hiking interest rates. ..goes in the right direction. It's very important to control inflation," the director of the IMF's Middle East and Central Asia Department, Jihad Azour, told Reuters.
Egypt interest rate rise outlook
Will there be a further Egypt interest rate rise? Analysis by French investment bank BNP Paribas as of 5 October indicated that Egypt will continue to face challenges in managing its monetary policy.
Despite the IMF funding, “the external financing gap will require significant net portfolio investment and direct investment inflows (at least USD 15-20 bn). Some of these flows will continue to come from Gulf countries which should continue to take stakes in local companies.”
Credit research agency Fitch Solutions expected Egypt’s inflation rate to peak close to 18% in December and “remain in double digits at least until July 2023”, averaging 11.2% next year, according to the note of 19 October. The agency added:
“While the weakening of the pound will continue to play a key role in sustaining inflationary pressures, the upward adjustment to administered prices, such as fuel, electricity, unsubsidised bread and other basic goods, will add to these pressures.
“As a result, inflation will likely fall back within the Central Bank of Egypt’s (CBE) 5.0%-9.0% inflation target range only by Q323. Should the CBE adjust its inflation target, then it could refrain from further hiking the policy rate and resort to other monetary policy tools to keep financial conditions tight.”
Data provider Trading Economics predicted at the time of writing (3 November) that the CBE could raise interest rates further to around 14.75% in 2023, before easing to 13.50% in 2024, according to its econometric models.
Final thoughts
Whether there is a further Egypt interest rate rise or cut will depend on the impact of global macroeconomic factors on the Egyptian economy, inflation rates, IMF requirements for the country to receive financing, as well as domestic monetary and fiscal policy.
Note that analyst and algorithm-based forecasts can be wrong and should not be used as a substitute for your own research. Always conduct your own due diligence, looking at the latest news, a wide range of analyst commentary, technical and fundamental analysis before taking any financial decision.
Keep in mind that past performance does not guarantee future returns, and never trade money you cannot afford to lose.
FAQs
Will interest rates go up in Egypt?
The direction of Egyptian interest rates will depend on macroeconomic and geopolitical factors, the rate of inflation, interest rate differentials to other countries and the Central Bank of Egypt’s implementation of monetary policy.
Why did Egypt increase interest rates?
Egypt has been increasing interest rates in 2022 as it deals with high inflation, capital outflows and low foreign currency reserves. Its latest interest rate hike in October 2022 was announced as part of a package to meet requirements for a funding arrangement from the IMF.
What is the highest interest rate in Egypt?
Interest rates in Egypt reached an all-time high of 21.4% in October 1991, according to data compiled by Trading Economics.
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