Egypt’s central bank hikes key interest rates by 200 basis points

Faced with an eroding currency and accelerating inflation, Egypt’s central bank raised its key interest rates by 200 basis points for the second policy meeting in a row late on Thursday, the bank said in a statement.

The central bank’s Monetary Policy Committee raised the overnight deposit rate to 18.75 percent from 16.75 percent and its overnight lending rate to 19.75 from 17.75 percent after also hiking them by 200 points each at the last policy-setting meeting in May.

“The balance of risks surrounding the inflation outlook has tilted more strongly to the upside with recent economic and
monetary developments. Consequently, the MPC decided that tightening monetary conditions is warranted to achieve the inflation target of 13 percent (+/- 3 percent) in Q4 2018 and single digits thereafter,” the committee said in its statement.

Egypt floated its currency in November, and since then its pound has roughly halved in value. As the currency’s value dropped, inflation surged: although the core rate slipped in May, it remains almost 30 percent year-on-year.

The central bank raised interest by 300 basis points after the currency floatation, which helped Egypt clinch a three-year $12 billion International Monetary Fund lending programme tied to ambitious reforms such as tax hikes and subsidy cuts.

The IMF has said lowering inflation is key to keeping its economic reform programme on track, and said as recently as last week it said that raising key interest rates could be an appropriate tool for doing so.