Egypt left interest rates unchanged, likely putting the brakes on more monetary tightening until a further devaluation of its currency that’s under sustained pressure from an economic crisis.
(Bloomberg) — Egypt left interest rates unchanged, likely putting the brakes on more monetary tightening until a further devaluation of its currency that’s under sustained pressure from an economic crisis.
The Monetary Policy Committee maintained the deposit rate at 18.25% and the lending rate at 19.25%, it said Thursday in a statement. Eight out of 11 economists in a Bloomberg survey correctly predicted the decision.
The hold came after a slight slowdown in inflation for April eased the urgency for the central bank of adding to the 900 basis points of increases it has delivered over the past year. That cooling is likely temporary, with consumer prices expected to accelerate in the coming months along with a much-awaited drop in the Egyptian pound.
The central bank “should continue hiking, but it should come in tandem with a devaluation,” Zeina Rizk, executive director of fixed income at Arqaam Capital in Dubai, told Bloomberg TV on Thursday before the announcement.
Read More: Egypt Makes Jumbo Rate Hike to Tackle Prices Hit by Devaluations
Russia’s invasion of Ukraine has hit the Egyptian economy particularly hard, triggering major food and fuel-price increases and spurring its worst foreign-currency crunch in years. Authorities have devalued the pound three times since early 2022, moves that helped secure a $3 billion deal with the International Monetary Fund.
The currency has lost about half its value against the US dollar over the past year, and more depreciation is widely expected as the government struggles to secure hard currency from foreign investors in the Gulf and beyond.
Read More: IMF Awaits More Egyptian Reforms Before First Review
Recent measures, including a 14% raise in the price of subsidized diesel, will pile on more inflationary pressures. The headline figure may accelerate to almost 37% in the third quarter of 2023, according to Farouk Soussa, an economist at Goldman Sachs Group Inc. The central bank targets inflation of 7%, plus or minus 2 percentage points, by the final quarter of next year.
Investors continue to demand higher yields for Egypt’s local debt amid concerns over price pressures and the prospect of further weakness in the pound, sending yields on its 12-month Treasury bills to a record high.
Also fueling expectations of Thursday’s hold were recent comments by central bank Governor Hassan Abdalla that higher interest rates can do little to contain inflation. Supply bottlenecks are mainly to blame, he said.
The IMF has said authorities should “use the monetary policy instruments” at their disposal, including interest rates, to tackle inflation. There could be a “high social cost” if prices remain elevated, the lender said last month.
–With assistance from Harumi Ichikura and Netty Ismail.
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