Cairo, Egypt – In a surprising move, the Central Bank of Egypt (CBE) announced on Thursday that it has raised interest rates by 100 basis points to contain the rising inflationary pressures.
The lending rate was increased to 20.25 percent, and the deposit rate to 19.25 percent, while the credit and discount rates were raised to 19.75 percent, according to the bank’s Monetary Policy Committee.
This decision marks the second interest rate hike in Egypt this year, following a 2 percent rise in late March for similar reasons. The CBE had kept the interest rate unchanged three times during the current year before this move.
The CBE’s statement highlighted that Egypt’s annual rate of general inflation in urban areas rose sharply to 35.7 percent in June 2023, up from 32.7 percent in May 2023. The annual rate of core inflation also increased to 41.0 percent in June 2023 from 40.3 percent in May 2023. This inflationary trend has been driven by a broad-based rise in the prices of most consumer price index items, resulting from persistent supply shocks.
The bank’s decision to raise interest rates comes as Egypt grapples with the economic challenges of high inflation, partially fueled by the global economic repercussions of the ongoing COVID-19 pandemic and the Russia-Ukraine conflict. The Egyptian pound was devalued twice in 2022, losing about half its value since March 2022, with one US dollar now officially exchanged for about 31 Egyptian pounds.
Egypt’s foreign debt also reached $165.3 billion by the end of March, registering a 4.8-percent increase from the same period in the previous year.
The CBE noted that the growth of the gross domestic product in Egypt is expected to slow down in the fiscal year 2022-2023, ending on June 30, before gradually picking up over the medium term.
In light of these economic challenges, the Egyptian government is focusing on attracting foreign investments and boosting the tourism sector as key sources of hard currency.
The CBE’s decision to raise interest rates reflects a concerted effort to ease inflationary pressure and stabilize the economy. By taking this step, the bank aims to strike a balance between the risks surrounding inflation and the need to support economic growth.
The move underscores the complex economic landscape Egypt faces and the proactive measures being taken to navigate these challenges. It remains to be seen how this interest rate hike will impact the broader economy and whether it will successfully curb inflation in the coming months.