The Central Bank of Egypt (CBE) on Thursday raised interest rates by 200 basis points, as the North African country is deepening economic reforms to secure an International Monetary Fund (IMF) loan.
Its Monetary Policy Committee has raised the overnight deposit and lending rates, two key interest rates, by 200 basis points to 13.25 percent and 14.25 percent respectively, while the central bank’s main operation rate and discount rate are both raised by the same margin to 13.75 percent.
The CBE also announced a switch to a more “durably flexible exchange rate regime, leaving the forces of supply and demand (in the international markets) to determine the value of the Egyptian pound against other foreign currencies,” according to a CBE statement.
The move aims to uphold the bank’s mandate of ensuring price stability in the loan market over the medium term and to better cope with “unprecedented shocks and challenges in the global economy,” the statement said, adding Egypt weathered large capital outflows and rising commodity prices.
The CBE explained that the elevated global and domestic prices are expected to keep headline inflation above its target of 5 to 9 percent in the fourth quarter of 2022.
“The objective of raising policy rates is to anchor inflation expectations and contain demand-side pressures,” it said.
Following the Egyptian central bank’s decision, the IMF released a statement quoting Ivanna Vladkova Hollar, its Mission Chief for Egypt, as saying the CBE’s “move to a flexible exchange rate regime is a significant and welcome step to unwind external imbalances, boost Egypt’s competitiveness, and attract foreign direct investment.”
The IMF said it has reached a preliminary agreement with the Egyptian government on supporting the latter with 3 billion U.S. dollars, in the form of a 46-month Extended Fund Facility.
The arrangement, aimed to provide Egypt with a balance of payments, budget support, and catalyze additional financing, is subject to approval by the IMF’s Executive Board in December, the statement noted.
“The CBE’s decision was significant for intensifying Egypt’s reform agenda to meet the IMF’s conditions for securing economic stability and achieving sustainable growth,” Waleed Gaballah, an Egyptian economic expert, told reporters.
After the central bank’s announcement, Egypt’s currency fell by more than 14 percent to a record low against the U.S. dollar on Thursday, trading at about 23 pounds to 1 dollar.
