{"id":616557,"date":"2024-03-07T00:00:00","date_gmt":"2024-03-07T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/07\/what-got-us-there-a-float-of-the-egp-and-a-600-bps-rate-hike\/"},"modified":"2024-03-07T00:00:00","modified_gmt":"2024-03-07T00:00:00","slug":"what-got-us-there-a-float-of-the-egp-and-a-600-bps-rate-hike","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/07\/what-got-us-there-a-float-of-the-egp-and-a-600-bps-rate-hike\/","title":{"rendered":"What got us there: A float of the EGP and a 600 bps rate hike"},"content":{"rendered":"

CBE takes its hands off EGP, delivers 600 bps rate hike: <\/strong>The Central Bank of Egypt floated the EGP yesterday, leaving the exchange rate \u201cto be determined by market forces\u201d after it hiked interest rates by 600 bps at a surprise monetary policy meeting. <\/p>\n

The EGP is worth just under 60% less against the greenback this morning <\/strong>compared to the same time yesterday, having closed the day at a range from 49.50 to 50.85 \u2014 it had been stuck at 30.95 since last year.<\/p>\n

What about interest rates? <\/strong>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<\/a>.<\/p>\n

\u201cThe unification of the exchange rate is crucial<\/strong>, as it facilitates the elimination of foreign exchange backlogs following the closure of the spread between the official and the parallel exchange rate markets,\u201d the CBE said in a statement (pdf)<\/a>.<\/p>\n

But, so too is a focus on inflation: <\/strong>The CBE said it will \u201ccontinue the transition to a flexible inflation targeting regime \u2026 and continue to target inflation as its nominal anchor.\u201d 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.<\/p>\n

Inflation could soon cool off significantly: <\/strong>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 \u2014 and trigger a faster-than-expected transition to a series of rate cuts <\/strong>as early as this spring or summer.<\/p>\n

What will drive inflation: <\/strong>An expected rise in fuel prices (the state can\u2019t afford to have its subsidy budget fly out of control) would hit the price of food, for starters. <\/p>\n

AND- High interest rates mean the government's cost of borrowing just went up, too. <\/strong>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.<\/p>\n

Big interest rates = big foreign appetite for Egypt<\/strong>?<\/strong>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\u2019re looking for returns of at least 30%, the source added. <\/p>\n

The private sector doesn\u2019t like high interest rates, either: <\/strong>\u201cWhile the CBE acknowledges that the tighter [monetary] stance could result in a short-term contraction in the private sector\u2019s real credit growth, the persistence of excessive inflationary pressures poses greater risks to its stability,\u201d the central bank said, adding that the hike will facilitate the private sector\u2019s growth over the medium term.<\/p>\n

Where did analysts see the EGP in the run-up to the float?<\/strong><\/p>\n