Central bank hikes interest rates by 2%

The Central Bank of Egypt decided on Thursday evening to raise interest rates by two percent, in the first hike since August 2023. 

The overnight lending and deposit rates were raised to 22.5 percent and 21.25 percent respectively by the decision.

Interest rates have remained steady for months despite rampant inflation in the country, with the average rate reaching a record 34 percent over the course of 2023. Prices skyrocketed further in the beginning of 2024.

Aside from the question of tackling inflation, anticipation accompanied the central bank’s monetary policy committee’s scheduled meeting this week as the country awaits news of when it can expect the next devaluation of the Egyptian pound.

An International Monetary Fund delegation is currently in Cairo amid ongoing negotiations around Egypt’s loan program and the IMF’s recommendation that Egypt liberalize its currency exchange value. 

The decision to hike interest rates by 200 basis points could mean that the devaluation “is not imminent,” said the head of research at the Arabeya Online trading company, Mostafa Shafie, speaking to Mada Masr.

“It’s not certain when [a devaluation] will happen of course,” said Shafie. “But normally moving the exchange rate would be accompanied by an interest rate hike to absorb the direct inflationary consequences.”

“Given that the central bank has raised the interest rate by a not inconsiderable margin, I wouldn’t expect any further decisions entailing a significant hike to interest rates any time soon, with what that type of step would mean for investment and growth due to its effect on consumer demand and expenditure.” 

Higher interest rates make it more difficult for companies or the government to take out loans in Egypt to invest in projects that drive growth or development. They also discourage consumers from spending, instead encouraging people to put funds in the bank to benefit from higher interest. 

The higher interest rates could also encourage foreign investors back toward the Egyptian bond market, boosting Egypt’s foreign currency inflows, said Shafie. 

To a lesser extent, the decision also aims to rein in dollarization, whereby traders lean toward buying dollars as confidence in the value of the Egyptian pound decreases. 

As the country sunk further into economic decline in recent months, the exchange value of the Egyptian pound against the US dollar on parallel markets has reached around LE70, atrophying away from its official rate of around LE31. 

“Preventing dollarization requires a steep interest rate hike to bolster the Egyptian pound, and would require follow-up decisions, such as the banks offering even higher high-interest savings certificates,”  said Shafie. 

At the end of January, the National Bank of Egypt and Banque Misr issued three-year savings certificates with interest rates ranging from 23 to 27 percent.

The new certificates were seen as a means of absorbing the liquidity that an earlier generation of savings certificates, offering 25 percent interest, had sought to retain in the banks in 2022.