The Central Bank of Egypt’s decision to fix the interest rate during its meeting on Thursday was widely expected, especially since views were highly divided days before the decision.
The Central Bank of Egypt announced that the interest rate would remain unchanged at 18.25 percent and 19.25 percent on deposits and lending, respectively. The credit and discount rate was also maintained at 18.75 percent.
According to the CBE statement, commodity prices appear to be falling and economic growth is likely to recover in the fiscal year starting next week.
The annual rate of headline and core urban inflation was 32.7 percent and 40.3 percent in May 2023, respectively. This is mainly due to the high prices of food commodities and the prices of non-food products.
The central bank said that the path of basic interest rates depends on expected inflation rates and not prevailing inflation rates and that maintaining restrictive monetary conditions is a prerequisite for achieving inflation targets of 7 percent on average during the fourth quarter of 2024, and 5 percent on average during the fourth quarter of 2026.
Read: Egypt Central Bank fixes interest rates after raising them 3%
In the run-up to the CBE meeting, analysts had mixed opinions between those who expected a rate fixation and those who were expecting an increase of between 100 basis points and 150 basis points.
But President Abdel Fattah al-Sisi’s statements about exchange rate flexibility have raised the prospects of stabilization. Sisi has said that his country’s exchange rate has become “national security” and that his government cannot approach it if it will affect the lives of Egyptians.
IMF support for the Egyptian central bank
IMF Managing Director Kristalina Georgieva said draining the pound’s support for Egypt’s foreign currency reserves was “like pouring water into a pierced bowl”.
Exchange rate flexibility is a key requirement of the International Monetary Fund (IMF) for the first review of Egypt’s $3 billion loan. The review was supposed to take place in March.
The IMF also requires Egypt to sell stakes in state subsidiaries that aim to bring in significant amounts of hard currency. Egypt was expected to raise $2 billion by the end of June under the plan but has raised only $200 million to date.
The decision to delay the rate hike appears linked to Egypt rebuilding its foreign currency reserves enough to manage another devaluation.
Goldman Sachs estimated that Egypt would need at least $5 billion to “enable an orderly transition to a single exchange rate.”
This means that the interest rate can remain stable until the necessary financing is raised for the time being, and the transition to a flexible exchange rate is made.
There is a vast difference between the official exchange rate and what is traded on the black market. While the pound is available at around 30.9 against the dollar in banks, it is trading on the black market at a weaker level by about a quarter at 38, according to Bloomberg.
Derivatives traders have abandoned their bets that the authorities will allow the Egyptian pound to fall sharply in the coming months.
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