Egypt Rate Hike Is Off Table With Devaluation Delayed: Day Guide

Mirette Magdy
·3 min read

(Bloomberg) -- Egypt’s central bank will likely wait out a pick up in inflation and put off interest-rate hikes until it builds its foreign-currency buffers enough to manage another currency devaluation.

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Time is short as the government is trying to raise billions of dollars soon through sales of stakes in state companies. Goldman Sachs Group Inc. estimates the central bank would need in excess of $5 billion to “enable the orderly transition to a unified, market-clearing exchange rate.”

Derivatives traders, meanwhile, have unwound bets that authorities would let the pound fall sharply in the coming months.

The upshot is that the Monetary Policy Committee on Thursday will probably extend a pause in place since a big rate increase in March. All but three economists in a Bloomberg survey of 15 forecasters expect the benchmark to stay at 18.25% for a second consecutive month.

Read More: Egypt Races to End Pound Dilemma in Hunt for Gulf, IMF Cash

“Both foreign-exchange and interest-rate adjustments will likely be postponed until after more substantial asset sales materialize,” said Carla Slim, an economist at Standard Chartered Plc.

Tighter monetary policy may be back on the agenda before long, even after the central bank already raised rates by 10 percentage points since March 2022 and allowed the pound to lose half its value following three devaluations. A shift to what authorities called a “durably flexible” exchange-rate regime also helped secure a $3 billion International Monetary Fund deal last year.

Read More: Gulf Powers Play Hardball Over Sending Billions to Rescue Egypt

But the commitment is in question because the pound has stayed stable for months even as its value fluctuates in the local black market. Investors that include energy-rich Gulf allies want clarity on the currency and proof Egypt is making deep economic reforms before pouring more money into the $470 billion economy.

While the pound is available at around 30.9 against the dollar in banks, it changes hands on the black market at a level that’s around a quarter weaker at near 38.

Households and corporates are already “squeezed” by higher inflation and rate hikes only threaten to add more pressures, said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. In her view, authorities will postpone changes in monetary policy until allowing more depreciation.

The costs of a weaker pound are adding up, with annual inflation hitting 32.7% in May to reach the fastest since 2017. Central bank Governor Hassan Abdalla has signaled higher rates could do little to contain price growth that he described as stoked mainly by supply issues.

Read More: Egypt Can’t Stand More Price Hikes After Pound Float, Sisi Says

President Abdel-Fattah El-Sisi also chimed in with a warning about the impact from currency devaluations on rising prices, saying the nation of over 100 million won’t be able to tolerate too many more hikes.

Authorities have to be mindful of the risks because the steep rise in the cost of living helped trigger the Arab Spring uprisings a little over a decade ago.

Even after an inflation pickup last month, the central bank may still opt to keep rates on hold until the “foreign-exchange situation gets resolved,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes.

--With assistance from Harumi Ichikura and Netty Ismail.

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