The Central Bank of Egypt (CBE) hiked interest rates by 100 basis points on Thursday as it looks to tackle persistently sticky inflation, it said in a statement ( pdf ) following its policy meeting. The hike came “to contain the inflationary pressures and anchor inflation expectations around the CBE’s targets,” the bank said as it defied expectations that it would leave rates unchanged for a third consecutive meeting.

Where rates now stand: The CBE’s Monetary Policy Committee (MPC) raised rates by 100 bps, leaving the deposit rate at 19.25%, the lending rate at 20.25% and the main operation and disc. rates at 19.75%. The central bank has now hiked rates by 1.1k bps since March 2022. The MPC left rates unchanged during its previous two monetary policy meetings in May and June.

Forecasters didn’t see this coming: All of the seven analysts and economists whom we surveyed in our interest rate poll ahead of last week’s meeting expected the MPC to hold rates steady. A number of analysts had predicted that the central bank would refrain from interest-rate adjustments until the banking system had built up its FX reserves ahead of an expected currency devaluation later in the year.

The committee is expecting inflation rates to peak in 2H 2023 before beginning to decline as a result outfits tighter monetary policy. The central bank is still targeting inflation of 7% (+/- 2 percentage points) on average by 4Q 2024.

REMEMBER- Inflation hit an all-time high of 35.7% in June from 32.7% the month before. Capmas and the CBE are expected to publish inflation figures for July on 10 August.

What will the impact be? Some of the analysts we spoke to ahead of the decision said foreign exchange rates and liquidity currently has a bigger impact on inflation than interest rates. Others had warned that higher rates would have a negative impact on government borrowing costs, while not doing much to attract portfolio inflows.

USD bonds rally on back of hikes: The MPC’s resumption of the monetary-tightening cycle spurred optimism that policymakers’ commitment to tackling inflation would positively impact our USD 3 bn loan program with the IMF, leading Egypt’s USD bonds to rise the most in emerging markets, Bloomberg reports. One bond saw its biggest gain since 14 July. “The rate hike, although modest, is a signal the authorities are making efforts to get the IMF program back on track,” one analyst told the business news outlet.

REMEMBER- A number of global investment banks — most recently Morgan Stanley — now think it unlikely officials will allow the EGP to slide against the greenback before September or October, which is when most expect the IMF to finally conduct the first review of our USD 3 bn loan program. A first review of the program has been on hold since mid-March after the country fell short of meeting several key conditions of the loan agreement.

The rate hikes got ink in the foreign press: (Associated Press | Bloomberg).

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