• CBE’s Bold Move: Egypt’s Monetary Policy Committee (MPC) raises CBE’s basic interest rates by 2%, marking the first increase since August, reaching 21.25% for deposits, 22.25% for lending, and 21.75% for credit, discount rates, and CBE’s main operation.
• Ongoing Economic Challenges: Amid the ongoing depreciation of the Egyptian pound (EGP) and discussions with the IMF for a modified loan program, Egypt faces domestic and global inflationary pressures, with an all-time high annual inflation of 39.7% in August.
• Analysts’ Surprise and Expert Insights: Most analysts did not anticipate the interest rate hike, with Ahmed Moatey, CEO of VIP Markets, attributing the decision to address inflationary pressures driven by both demand and supply factors, along with geopolitical tensions. Economic expert Alaa Rizk notes the negative impact on Egypt’s investment climate but sees it as a necessary step amid the crisis, anticipating a depreciation of the local currency.

Egypt’s Monetary Policy Committee (MPC) recently made a decision to raise the Central Bank of Egypt’s (CBE) basic interest rates by 2%, marking the first increase since August. 

The new rates stand at 21.25% for deposits, 22.25% for lending, and 21.75% for credit, discount rates, and the main operation of CBE.

In 2023, the CBE has raised interest rates by a total of 300 basis points (bps), with increments of 200 bps in March and 100 bps in August. 

This decision comes amid the ongoing depreciation of the Egyptian pound (EGP) and discussions with the International Monetary Fund (IMF) for a modified loan program.

Geopolitical uncertainties and persistent disruptions in maritime trade continue to contribute to domestic and global inflationary pressures. 

Egypt witnessed an all-time high annual inflation of 39.7% in August, underscoring the challenges faced by the country amid a severe economic crisis.

In December 2023, Egypt’s yearly urban inflation rate decelerated for the third straight month, reaching 33.7%, down from the six-month low of 34.6%. This figure, although slightly surpassing market forecasts of 33.4%, still significantly exceeds the upper limit of the central bank’s target range of 5-9%. This represents the lowest inflation rate since May and is primarily attributed to a slowdown in food inflation, which stood at 60.5% compared to 64.5% in November.

Analytical Overview

The interest rate hike took most analysts by surprise, as a Reuters poll of 16 analysts suggested an expectation of maintaining current interest rate levels. 

According to Ahmed Moatey, the CEO of VIP Markets, the CBE’s decision is driven by its vision to address ongoing inflationary pressures, stemming from both demand and supply sides. 

Geopolitical tensions and disruptions in maritime navigation further exacerbate these pressures, aligning with the views of the US Federal Reserve and the European Central Bank.

Moatey emphasizes that current tensions in the Red Sea create a supply shortage, leading to longer shipping durations and increased insurance costs. This prompted the CBE to raise interest rates as a measure to mitigate ongoing inflation expectations, absorb liquidity, and control inflation rates.

Economic expert Alaa Rizk notes that while the interest rate hike negatively impacts Egypt’s investment climate, it is a necessary decision considering the ongoing crisis. 

He anticipates an imminent depreciation of the local currency and believes the interest rate hike signals the beginning of a monetary tightening process, albeit requiring time and supported liquidity in the foreign exchange market.

Banks’ Reaction to the Decision

In response to the CBE’s decision, the Assets and Liabilities Committees (ALCO) responsible for setting interest levels in banks will adjust interest rates on their savings and loan products. 

Variable-return certificates and some loan products linked to interest rates have already seen a 2% increase.

Egypt and IMF Package

The International Monetary Fund (IMF) recently announced an agreement with Egypt on key policy components of an economic reform program, indicating progress towards finalizing a deal to augment the country’s $3 billion loan, according to media reports.

IMF Managing Director Kristalina Georgieva stated that negotiations are in the “very last stretch,” highlighting the urgency of reaching an agreement.

IMF disbursements on the loan were put on hold last year, and negotiations involve addressing issues related to the Egyptian pound’s fixed exchange rate and its impact on the country’s economic dynamics.

According to Daniel Leigh, IMF Division Chief of the Research Department “We forecast that growth in Egypt will recover next year from 3 percent this year to 4.7 percent.

“This will be supported by IMF financing. In terms of the EFF program, what I can say is that the additional financing is critical to the IMF program. What I can say is that the IMF is in discussions with the authorities on a set of policies that could support the completion of the first and second reviews of the program, “ he added during the launch of World Economic  Forum (WEF) update on January 30,