The Central Bank of Egypt (CBE) is heading towards raising the interest on the pound on Thursday, following an increase declared on 17 March, so as to accommodate for the inflation caused by the high exchange rate of the dollar against the pound.
The CBE’s Monetary Policy Committee will hold its third meeting of the year to discuss the CBE’s basic interest rate, which is the main indicator of interest rates on the pound in the local market.
On 17 March the committee decided to raise interest rates by 1.5% to reach 10.75% for deposit, 11.75% for lending, and 11.25% for main credit and debit operations at the CBE.
The committee attributed this decision to the CBE’s desire to accommodate for the inflation caused by the increasing exchange rate of the dollar against the pound. The CBE also wishes to maintain the stability of commodity prices to keep inflation under 10% in the medium term, and maintain the purchasing power of the local currency.
On 10 April, the CBE revealed that the annual inflation rate at the end of March had dropped to 9.02% from 9.13% in February. The core annual inflation rate, however, increased to 8.41% in March compared to 7.5% in February.
According to Osama El-Menilawy, assistant general manager of the financial department at a private bank operating in Egypt, there are strong expectations for another surge in basic yield rates by up to 1%.
El-Menilawy explained that the market has seen successive rises in commodity prices over the past few months due to the high exchange value of the dollar against the pound on the informal market, in addition to further expected increases in the coming period.
He added that the prices of food commodities often increase by Ramadan, which, this year, will coincide with the summer season when electricity and water bills increase. Moreover, there are rumours that value added tax (VAT) will soon be imposed.
Collectively, all the factors will push inflation up, he said, which has prompted the CBE to move proactively to accommodate for the expected inflation.
El-Menilawy pointed out that debt instruments offered by the government to cover the state budget deficit will also rise, driven by the increase in the interest rate on the pound.
He added that the government did not offer long-term bonds this month, to mitigate costs in the long run, and only put forward short- and medium-term debt instruments.
El-Menilawy noted that most existing investments in Egypt are in infrastructure projects, which have a special status with regard to interest rates, therefore, they will not be affected by lifting the interest rate on the pound.
