In an unexpected move, Egypt’s central bank (CBE) announced on Wednesday that it has raised interest rates by 600 basis points and will allow the country’s currency, the pound, to trade freely. This decision is aimed at restoring economic stability and attracting investment from Gulf countries.
Read more: Central Bank of Egypt holds interest rates steady for third time in a row
Sharp decline in Egyptian pound
As a result of the announcement, the Egyptian pound experienced a sharp decline against the U.S. dollar when the markets opened. The exchange rate fell from approximately 30.85 pounds to the dollar to over 45 pounds to the dollar. This devaluation has been long-awaited and is in line with one of the key demands of the International Monetary Fund (IMF) for a more flexible exchange rate.
In the past, Egypt has made similar promises to adopt a more flexible exchange rate but then reverted to closely managing the currency whenever it weakened. However, this time the government may be relying on the influx of hard currency from investment projects, including a recent $35 billion deal with the UAE, to prevent a freefall of the pound. Additionally, officials have indicated that the government is close to expanding its existing $3 billion pound support program with the IMF.
Significant gains in Egypt’s international bonds
Following CBE’s announcement, Egypt’s international bonds experienced significant gains, with longer-dated bonds seeing the largest increase. According to Tradeweb data, the 2047 bond recorded the highest gain of 3.5 cents, reaching 83.2 cents. The premium demanded by investors to hold Egypt’s international bonds compared to safe-haven U.S. Treasuries also tightened to 529 basis points, the lowest level since June 2021, according to data from JPMorgan.
Ensuring a decrease in underlying inflation
CBE stated that it has raised the overnight lending rate to 28.25 percent and the overnight deposit rate to 27.25 percent as part of its decision to implement a more aggressive monetary tightening strategy and ensure a decrease in underlying inflation. In its statement, CBE highlighted that it will continue to target inflation as its primary focus while allowing the exchange rate to be determined by market forces, thus facilitating a smooth transition.
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