In surprise move, Egypt central bank hikes key interest rates

CAIRO (Capital Markets in Africa) – Egypt’s central bank raised its key interest rates by 200 basis points on Sunday, confounding the expectations of economists who saw rates unlikely to change, but in line with recent IMF statements.

At a meeting of its Monetary Policy Committee, the bank hiked its overnight deposit rate to 16.75 percent from 14.75 percent and its overnight lending rate to 17.75 from 15.75 percent, it announced in a statement.

This was the bank’s first increase in rates since it aggressively hiked them 300 basis points in November.

Egypt floated its currency in November and it has roughly halved in value since then. The move helped it clinch a $12 billion three-year International Monetary Fund lending programme tied to ambitious reforms such as tax hikes and subsidy cuts.

Inflation has soared to a three-decade high since the currency float, with annual urban inflation reaching 31.5 percent in April.

The IMF has said lowering inflation is key to keeping its economic reform programme on track and said as recently as last week that raising key interest rates could be an appropriate tool for doing so.

But economists polled by Reuters last week overwhelmingly expected rates to remain unchanged, with 13 of 14 economists predicting them to stay put amid lower lending growth in recent quarters.

“We believe that a hike in the CBE corridor interest rates might not be the appropriate tool to curb inflation and would render investment irrational at such high cost of debt rates,” said a research note from Arqaam Capital.

Justifying the hike, the central bank statement said “the balance of risks surrounding the inflation outlook has tilted more strongly to the upside with recent economic and monetary data releases pointing to strengthening demand-side pressures”.

It said the bank “envisages risks related to inflation expectations resulting from elevated annual inflation levels despite the continued moderation of monthly rates”.


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