Egypt’s central bank may have to raise interest rates by as much as 300 basis points when it meets later this month, after February’s inflation far surpassed expectations, according to Goldman Sachs Group Inc.
A rate hike of that size has a recent precedent in Egypt, which has also had to devalue its currency several times over the past year. In December, the central bank hiked the benchmark deposit rate by 300 basis points — the most since 2016 — to 16.25% but has since kept it there.
“Containing inflation expectations and, in particular, improving domestic FX liquidity to ease chronic pressure on the Egyptian pound will require the Central Bank of Egypt to pursue tighter monetary policy in the coming months,” Farouk Soussa, an economist at Goldman in London, said in a report.
Goldman previously said it couldn’t rule out an unscheduled rate increase in response to pressure on inflation and the pound. Economists at Cairo-based Naeem Brokerage said after the latest inflation data that “an emergency meeting” may precede a hike of 200-300 basis points.
A surge in inflation to the fastest in over five years has turned Egypt’s official borrowing costs deeply negative when adjusted for inflation. A real rate that was once the world’s highest is now almost 16% below zero, one of the lowest among more than 50 major economies tracked by Bloomberg.
The Monetary Policy Committee surprised by leaving rates on hold last month, saying it was assessing the impact of a combined 800 basis points of increases in 2022. It targets inflation of 7%, plus or minus 2 percentage points, by the fourth quarter of next year.
But in February consumer prices climbed an annual 31.9%, with food costs growing at a record pace. The pound has lost almost half of its value since last March as Egypt struggles with its worst foreign-exchange shortage in years.
The International Monetary Fund approved a $3bn loan for Egypt in December, with the full disbursement conditional on reforms that include a shift to a more flexible exchange rate.
“The risk of further pound weakness in the immediate term is high, particularly within the context of the first review under the IMF programme, due this month,” Soussa said.
A woman carries bread as she leaves a bakery in Cairo. In February, consumer prices climbed an annual 31.9%, with food costs growing at a record pace. The pound has lost almost half of its value since last March as Egypt struggles with its worst foreign-exchange shortage in years.
