The Central Bank of Egypt (CBE) raised key interest rates by 6% on Wednesday, aiming to combat persistent inflation and unify the country’s exchange rate.
The move comes as Egypt grapples with foreign exchange shortages, a weakened currency, and global inflationary pressures. These factors have driven headline inflation to record highs, exceeding the CBE’s target of 7% for 2024.
“While annual inflation figures have recently declined, they are expected to remain substantially above the target,” the CBE said in a statement.
The bank emphasized its commitment to price stability and a flexible inflation targeting regime. To achieve these goals, the Monetary Policy Committee (MPC) raised the overnight deposit rate, lending rate, and the main operation rate by 600 basis points to 27.25%, 28.25%, and 27.75%, respectively. The discount rate was also raised to 27.75%.
This decision builds on a previous rate hike of 2% in February 2024. The MPC aims to accelerate disinflation and bring underlying inflation under control.
“Anchoring inflation expectations is critical,” the MPC said, highlighting the need for a positive real interest rate.
The CBE acknowledges that the tighter monetary policy stance could dampen private sector credit growth in the short term. However, they believe that curbing inflation is crucial for long-term economic stability and sustainable private sector growth.
These measures are part of a broader economic reform package implemented in collaboration with the government and supported by international partners. The CBE secured sufficient foreign exchange liquidity and will work with the government to minimize the impact of external factors on the domestic economy.
The elimination of the parallel foreign exchange market is expected to reduce inflation and stabilize the economy in the medium term. However, the CBE acknowledges potential risks, including regional geopolitical tensions and global economic volatility. They will reassess inflation targets as needed and continue monitoring economic developments.
The MPC remains committed to achieving its price stability mandate and will adjust policy rates based on future inflation forecasts. The bank reiterates that unifying the exchange rate is crucial for addressing foreign currency demand and promoting economic stability.
