The Central Bank of Egypt raised the main interest rates by 200 basis points in the Monetary Policy Committee meeting. What is the impact of this on the dollar exchange rate in Egypt?
The Monetary Policy Committee of the Central Bank of Egypt increased the interest rate on overnight lending to 12.25% from 10.25%, and raised the overnight deposit rate to 11.25% from 9.25%.
Most expectations indicated that the Central Bank of Egypt would continue its hard-line policy.
Analysts, in a Archyde.com poll this week, expected the bank to raise the lending rate by an average of 200 basis points to 12.25%, and raise the overnight deposit rate by 175 basis points to 11%.
The Central Bank of Egypt’s decision comes today, regarding two weeks following the US Federal Reserve raised interest rates by 0.25%, to become within the range of 0.25%-0.50%.
What is the effect of raising interest rates in Egypt on the dollar exchange rate?
Changes in the interest rate in Egypt affect the US dollar significantly. When the Central Bank of Egypt raises the interest rate, the value of the Egyptian pound depreciates once morest the dollar, which is getting stronger in the Egyptian market.
The exchange rate of the dollar once morest the Egyptian pound rose months ago, when the Central Bank of Egypt decided to raise interest rates, as one dollar exceeded 18 Egyptian pounds or more and has not fallen below this limit since that time.
After the recent increase of the Central Bank, announced today, by increasing the main interest rates by 200 basis points, and the overnight lending rate to 12.25% from 10.25 percent, and raising the overnight deposit rate to 11.25% from 9.25%, the US dollar is expected to exceed the barrier of twenty pounds or more.
The Egyptian currency is affected by the increase in interest due to the state’s reliance on imports and dependence on borrowing and the rise in debt service that it uses to bridge its budget deficit.
To ensure the stability of the exchange rates of their currencies once morest the dollar, Arab and foreign countries rushed to raise interest rates on their currencies at the same rate set by Washington.
Meanwhile, the Egyptians eagerly waited for their central bank’s decision and called it for an urgent session to resolve the controversy over the fate of the interest rate.
The Central Bank had entered the Eid al-Fitr holiday. In the first reaction following the end of the holiday, Egyptian press websites reported that the Monetary Policy Committee of the Central Bank will meet at its normal time.
An official at the bank said in statements to the Misrway website, “There is no need to amend the date of the committee’s meeting.”
Over the course of the week, dollar prices in Egyptian banks witnessed a relative stability at 18.43 pounds for purchase and 18.53 pounds for sale.
Inflation is a major target
The Monetary Policy Committee of the Central Bank of Egypt expected that the inflation rates will relatively exceed the target rate of the bank between five and nine percent on average during the fourth quarter of 2022 “temporarily”, and that it will gradually decline once more.
It noted that annual urban consumer price inflation accelerated more than expected in April to 13.1 percent from 10.5 percent, its highest level since May 2019.
The bank raised interest rates by 100 basis points in a surprise meeting on March 21, which it attributed to global inflationary pressures exacerbated by the war in Ukraine, following keeping them unchanged for nearly 18 months. On the same day, the exchange rate of the pound once morest the dollar fell by 14 percent.
“It appears that the primary objective for now is to curb inflation, which is very much in line with central banks elsewhere…it appears that inflation will continue to rise in the near term,” said Allen Sandeep, head of research at Naeem Holdings.
Today’s statement said that global financial conditions are constraining as central banks tighten monetary policies.
“Achieving low and stable inflation rates in the medium term is a prerequisite for supporting the purchasing power of the Egyptian citizen and achieving high and sustainable growth rates,” the committee said.
