CBE takes its hands off EGP, delivers 600 bps rate hike: The Central Bank of Egypt floated the EGP yesterday, leaving the exchange rate “to be determined by market forces” after it hiked interest rates by 600 bps at a surprise monetary policy meeting.

The EGP is worth just under 60% less against the greenback this morning compared to the same time yesterday, having closed the day at a range from 49.50 to 50.85 — it had been stuck at 30.95 since last year.

What about interest rates? The CBE raised its overnight deposit rate by 600 bpd to 27.25%. The lending rate now stands at 28.25% and the main operations rate is now at 27.75%. This is the second rate hike of 2024, following a 200 bps move last month.

“The unification of the exchange rate is crucial, as it facilitates the elimination of foreign exchange backlogs following the closure of the spread between the official and the parallel exchange rate markets,” the CBE said in a statement (pdf).

But, so too is a focus on inflation: The CBE said it will “continue the transition to a flexible inflation targeting regime … and continue to target inflation as its nominal anchor.” This comes as the FX crunch, rising global commodity prices, and domestic supply shocks have hampered economic growth and added to inflationary pressures, the bank explained.

Inflation could soon cool off significantly: Many (perhaps even most) goods now in Egypt are priced at an implied exchange rate in the EGP 70 range, so an EGP in the 40-50 band against the greenback is an appreciation for most businesses and households, suggesting the inflationary hit from the float could be very manageable — and trigger a faster-than-expected transition to a series of rate cuts as early as this spring or summer.

What will drive inflation: An expected rise in fuel prices (the state can’t afford to have its subsidy budget fly out of control) would hit the price of food, for starters.

AND- High interest rates mean the government's cost of borrowing just went up, too. That could see the cost of debt service rise by as much as 8% by 2H 2024 to something in the range of EGP 800 bn to EGP 1 tn, a senior Finance Ministry official tells us.

Big interest rates = big foreign appetite for Egypt?Egypt is expected to see the return of foreign inflows to debt markets, lured by high interest rates, the official added. Yields on debt instruments have jumped in the past few days, with international investors signaling they’re looking for returns of at least 30%, the source added.

The private sector doesn’t like high interest rates, either: “While the CBE acknowledges that the tighter [monetary] stance could result in a short-term contraction in the private sector’s real credit growth, the persistence of excessive inflationary pressures poses greater risks to its stability,” the central bank said, adding that the hike will facilitate the private sector’s growth over the medium term.

Where did analysts see the EGP in the run-up to the float?

  • HSBC’s chief economist for CEEMEA, Simon Williams, told Enterprise earlier this week that his view was largely unchanged at 40-45;
  • Oxford Economicssaw the EGP falling to 55-60 to the USD;
  • Bloomberg’s chief emerging markets economist Ziad Daoud predicted the greenback to change hands at 50 or more;
  • Capital Economics is the least optimistic, seeing the EGP dropping to 65 against the USD.

^^ With the exception of HSBC’s figure, the others were all speaking in early February — it will be interesting to see how they update their 12-month forecasts in the days to come.

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