Egypt looked past a pick-up in inflation to keep interest rates unchanged for a second month, with the central bank’s next bout of monetary tightening likely hinging on the country’s ability to secure the foreign exchange needed to manage another currency devaluation.
The Monetary Policy Committee on Thursday maintained the deposit rate at 18.25% and the lending rate at 19.25%, in a decision that matched the forecasts of most economists surveyed by Bloomberg. The MPC said in a statement it will continue to assess the impact of previous increases after recent data came in line with its expectations.
Read More: Egypt Races to End Pound Dilemma in Hunt for Gulf, IMF Cash
The prospects for the currency will probably dictate what happens next. The central bank already allowed the pound to lose half its value following three devaluations, while raising rates by 10 percentage points since March 2022.
Cash-strapped Egypt is racing to secure buyers for dozens of state assets. A shift to what authorities called a “durably flexible” exchange-rate regime also helped secure a $3 billion International Monetary Fund deal last year.
But the currency has remained stable at around 30.9 per US dollar for months at the nation’s banks, even as its value has fluctuated in the local black market where it currently changes hands at about 38.
Derivatives traders, meanwhile, have unwound bets that authorities would let the pound fall sharply in the coming months.
“The hold further reinforces our view that Egypt is unlikely to move toward a more flexible exchange rate regime in the coming months barring an unexpected substantial inflow of foreign currency,” said Farouk Soussa, an economist at Goldman.
The latest rate pause comes despite an uptick in inflation near 33% in May, the fastest since 2017. The central bank targets price growth of 7%, plus or minus 2 percentage points, by the fourth quarter of next year.
In its statement on Thursday, the MPC repeated that “the path of future policy rates remains a function of forecasted inflation rather than prevailing inflation rates.”
Read More: How to Know Where Egypt’s Once-in-Decade Crisis Is Heading
Central bank Governor Hassan Abdalla earlier this year suggested higher rates could do little to contain price growth that he described as stoked mainly by supply issues.
Households and corporates are already “squeezed” by elevated inflation and rate hikes may just pile on yet more pressure, according to Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC.
The government has said tackling inflation is a top priority. President Abdel-Fattah El-Sisi last week warned about the impact of currency devaluations on rising prices, saying the nation of over 100 million won’t be able to tolerate much more weakening of the pound.
Read More: Egypt Can’t Stand More Price Hikes After Pound Float, Sisi Says
A hold makes sense “until the foreign-exchange situation gets resolved,” Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes, said before the announcement.
--With assistance from Netty Ismail, Harumi Ichikura and Abdel Latif Wahba.
Author: Mirette Magdy and Tarek El-Tablawy
