The Central Bank of Egypt (CBE) decided on Wednesday morning to allow market forces to determine the value of the Egyptian pound (EGP), while simultaneously raising interest rates by 6 percent.
This move, implemented just before the holy month of Ramadan, typically a period of increased demand for commodities, marks the fourth devaluation of the Egyptian pound since 2022, all to curb inflation.
The step aims to unify the exchange rates and eliminate foreign exchange backlogs following the closure of the spread between the official and the parallel exchange rate markets, the bank said after a special meeting of its Monetary Policy Committee (MPC).
“The elimination of the parallel foreign exchange market is expected to dampen inflation expectations, rein in underlying inflation. Accordingly, headline inflation is projected to follow a steadily decelerating path over the medium term,” the MPC’s statement read
The domestic economy has been recently weighed down by foreign exchange shortages, resulting in the existence of a parallel exchange rate market and constraining economic growth, noted the CBE.
Despite the decline of the annual inflation figures, they are expected to remain substantially above the CBE’s inflation target of seven percent (±2 percentage points) on average in 2024 Q4.
Coinciding with this, external spillovers emanating from global inflationary pressures have continued to accumulate as the world economy witnesses successive shocks. Such shocks elevated risk-off sentiment and inflation expectations, amplifying underlying inflation, it continued.
The resulting exchange rate movements and significant passthrough of international commodity prices, coupled with domestic supply shocks, have resulted in persistent inflationary pressures driving headline inflation to record levels, it added
“To ensure a smooth transition, the CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces,” the statement added.
Unprecedented interest rate hike
The CBE also decided to accelerate the monetary tightening process to fast-track the disinflation path and ensure a decline in underlying inflation.
The bank said the step could result in a short-term contraction in the private sector’s real credit growth, but the persistence of excessive inflationary pressures poses greater risks to its stability.
The price stability, the CBE added, fosters an environment conducive to sustainable private sector growth over the medium term.
Accordingly, the CBE’s overnight deposit rate, the overnight lending rate, and the rate of the main operation were raised by 600 basis points to 27.25 percent, 28.25 percent, and 27.75 percent, respectively.
The discount rate was also raised by 600 basis points to 27.75 percent, added the statement.
