a year ago

Egypt's central bank raises interest rates to tame inflation

The headquarters of Central Bank is seen in downtown Cairo, Egypt on December 27, 2016 — Reuters/Files
The headquarters of Central Bank is seen in downtown Cairo, Egypt on December 27, 2016 — Reuters/Files

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The Central Bank of Egypt (CBE) raised its overnight interest rates by 200 basis points (bps) on Thursday following a meeting of its Monetary Policy Committee (MPC), saying it aimed to bring high inflation into check.

The bank set the lending rate at 19.25per cent and the deposit rate at 18.25 per cent, reports Reuters.

The median forecast in a Reuters poll of 15 analysts on Monday was for the bank to increase rates by 200 bps as it struggled to control surging inflation. Seven of the analysts expected an increase of 300 bps.

In February, headline inflation soared to a five-and-a-half-year high of 31.9 per cent from 25.8 per cent in January. Core inflation in February rose to a record high of 40.3 per cent.

"The MPC stresses that achieving a tight monetary stance is a necessary condition to attain the CBE's upcoming inflation targets of 7 per cent (± 2 percentage points) on average by 2024 Q4 and 5 per cent (± 2 percentage points) on average by 2026 Q4," it said in a statement.

Domestic supply chain disruptions, a depreciating Egyptian pound, demand side pressures "as evidenced by developments in real economic activity relative to potential capacity" and high broad money growth outturns fuelled inflation, the statement said.

Since last March, the Egyptian pound's official exchange rate has fallen by almost half, to around 30.87 pounds to the dollar, after Russia's invasion of Ukraine exposed vulnerabilities in the country's finances, prompting a foreign exodus from its treasuries market.

On the black market it has sunk to between 35 and 36 to the dollar.

M2 money supply, which in Egypt includes deposits in foreign currency, grew by 31.6 per cent year-on-year in January and 31.5 per cent in February.

At its last meeting on February 2, the central bank left interest rates steady, saying 800 bps in rate hikes put in place over the previous year would help to tame inflation, which in December had accelerated to a five-year high of 21.3 per cent.

The MPC statement said gross domestic product had slipped to 3.9 per cent in the fourth quarter of 2022 from 4.4 per cent in the third quarter.

"Real GDP growth is expected to soften in fiscal year 2022/23 compared to the previous fiscal year, before picking up thereafter." Egypt's fiscal year ends on June 30.

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