Egypt is set for another jumbo interest-rate hike on Thursday, seeking to put the brakes on inflation that’s soared past many analyst estimates after a series of currency devaluations.
(Bloomberg) — Egypt is set for another jumbo interest-rate hike on Thursday, seeking to put the brakes on inflation that’s soared past many analyst estimates after a series of currency devaluations.
With record food prices piling on the pain for consumers, the central bank appears near-certain to resume a cycle of monetary tightening after a surprise pause last month. All but one of 11 economists surveyed by Bloomberg are expecting increases of 150-300 basis points. Only Citigroup Inc expects a hold.
The Monetary Policy Committee hiked the benchmark deposit rate by 300 basis points to 16.25% in December, the most since 2016. It’s held steady since, saying it was assessing the impact of a wave of increases last year.
Now though, there are “few options for the central bank but to raise rates,” said Mohamed Abu Basha, head of macroeconomic research at Egyptian investment bank EFG Hermes. He cited chronic pressure on the local currency and a wave of global monetary tightening.
Inflation surged to an annual 31.9% in February, its fastest pace in more than five years, reflecting three devaluations of the pound since Russia’s invasion of Ukraine tipped Egypt, a major food importer, into economic crisis. Loosening control over the exchange-rate was a key pledge in a $3 billion rescue package authorities agreed with the International Monetary Fund.
Read: How to Know Where Egypt’s Once-in-Decade Crisis Is Heading
Raising rates, however, may only be a stopgap solution. Pressure is building again on the pound as Egypt races to find foreign investment to tackle its external funding gap, including through an ambitious plan of company stake sales.
The difference between the official and black market rates for the Egyptian pound have widened in recent weeks amid expectations of a fourth devaluation that would send consumer prices higher still.
Read: Egypt’s Pound Weakens in Black Market on Devaluation Bets
Goldman Sachs Group Inc. expects inflation to peak in the third quarter at around 36%, barring any further devaluations.
A hike would also begin to readjust Egypt’s inflation-adjusted interest rate, which was once the world’s highest and is now almost 16% below zero. Steadily correcting that could help the country attract back some of the billions of dollars of foreign investment in local debt it used to see.
Tightening is needed “to lean against rising inflation expectations and to reduce the real-interest rate differential with other major economies,” said Farouk Soussa, a Goldman economist.
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