Photographer: Shawn Baldwin/Bloomberg

Egypt Raises Rates to Decade-High to Curb Soaring Inflation

  • Central bank raises key rate by 100 basis points to 11.75%
  • Move follows a surge in core inflation to seven-year high

Egypt’s central bank raised its benchmark interest rate to the highest level in at least a decade in an attempt to curb a surge in prices that followed a currency devaluation in March.

Policy makers on Thursday raised the overnight deposit rate by 1 percentage point to 11.75 percent, according to a statement. The overnight lending rate was raised by the same amount to 12.75 percent. A Bloomberg survey showed economists were split before the meeting, with three predicting a hold and three forecasting an increase by as much as 50 basis points.

The central bank devalued the pound in March by more than 10 percent and said it would adopt a more flexible exchange rate to ease a dollar shortage that led to the emergence of a black market for the U.S. currency. The downside of the devaluation was clear by May, with annual core inflation reaching 12.23 percent, the highest level since 2009. On the black market, the Egyptian pound still traded at 10.96 per dollar, compared with the official rate of 8.88.

The rate rise “is warranted to anchor inflation expectations over the medium-term,” the central bank said in a statement on its website. The pound’s devaluation was among the factors contributing to the rise in inflation, the regulator said, along with repricing of regulated goods, supply shocks and the rise in demand ahead of the holy month of Ramadan.

“The latest inflation figures combined with the pressures on the pound have forced policy markers to take quite aggressive action,” said Jason Tuvey, London-based Middle East economist at Capital Economics. “The central bank will need to loosen its grip on the pound sooner rather than later. This hike possibly prepares the grounds for another round of devaluation.”

Government measures to boost revenue planned for later in the year may also raise prices further, economists say. Those include more cuts to electricity subsidies and the implementation of value-added taxation. Such steps “indicate that there is room for further interest rate hikes later in the year,” said Mohamed Abu Basha, a Cairo-based economist at investment bank EFG-Hermes.

Some economists had said the bank would be reluctant to raise borrowing costs because that would likely increase the government’s debt burden, hampering efforts to reduce the budget deficit to below 10 percent of economic output. Public debt stood at 98.4 percent of gross domestic product in December, and the government expects interest expenses to make up about a third of its spending next year.

“Fiscal consolidation policies are necessary and will favorably contribute to macroeconomic stability and sustainable economic growth over the medium-term,” the bank said.

The “aggressive” nature of Thursday’s decision means budget concerns will not deter the central bank from pursuing its main mandate of price stability, according to Abu Basha. Inflation remains “high on the central bank’s agenda,” he said.

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