CAIRO -

Following an extraordinary meeting of the Monetary Policy Committee on Monday morning, the Central Bank of Egypt announced that it will raise key interest rates by 100 basis points.

Accordingly, the overnight lending rate moved to 10.25%, and the overnight deposit rate to 9.25%, after it remained stable at 8.25% for deposits and 9.25% for lending.

Simultaneously, the exchange rate of the US dollar within Egyptian banks moved to equal 18.25 pounds for sale and 18.15 pounds for purchase - as of writing this report - without the issuance of an official statement from the concerned authorities stating a partial floatation of the local currency or specifying that flotation.

Yesterday, Sunday, the average price of the dollar recorded 15.74 pounds for sale and 15.66 pounds for purchase.

Only about an hour after the Central Bank’s decision, the National Bank of Egypt and Al-Ahly Bank, the two largest government banks, offered a new savings certificate with an interest rate of 18% for a period of one year, with a fixed return paid monthly.

The Monetary Policy Committee was scheduled to meet next Thursday, but the meeting was held suddenly this morning, Monday, after a series of statements by media figures affiliated with the authority, during the past days, paving the way for emergency decisions expected by the government to control the economic repercussions of the Russian-Ukrainian war.

shock absorber

Through an official statement, the Central Bank said that in light of the successive developments and in view of the target inflation rate of 7% - with a deviation rate of 2%, down and up - on average during the fourth quarter of 2022;

The Monetary Policy Committee made the decision to raise interest rates.

He added that higher international commodity prices, resulting from further disruptions in the supply chain and increased risk aversion, added to domestic inflationary pressures as well as external imbalances.

On top of these pressures comes the noticeable rise in global commodity prices, supply chain disruptions and rising freight costs, in addition to financial market volatility in emerging countries, which led to domestic inflationary pressures and increased pressure on the external balance, the Central Bank said in its statement.

He affirmed his belief in the importance of exchange rate flexibility to serve as a tool to absorb shocks and maintain Egypt's competitiveness, pointing out his commitment to maintaining the country's macroeconomic stability while preserving its gains.

The Central Bank reduced interest rates by a total of 4% during the first half of 2020, while interest rates were fixed during its last 10 meetings, including 8 meetings held during the past year.

The Central Bank of Egypt says it is trying to maintain the competitiveness of Egypt (Reuters)

expected action

The governor of the Central Bank of Egypt said that the local currency - the pound - witnessed a correction today, Monday, and that its price is in line with global and local developments, adding that the correction enhances its competitiveness, according to Reuters.

Governor Tariq Amer added in a press conference that the Central Bank’s decisions to raise the main interest rate by 100 basis points are aimed at maintaining foreign exchange liquidity and protecting state resources in light of the economic pressures resulting from the Russian war on Ukraine crisis.

The Egyptian pound fell about 14%, after the currency remained under pressure for weeks, as foreign investors withdrew billions of dollars from the Egyptian treasury market following the Russian invasion of Ukraine.

In turn, the Undersecretary of the Plan and Budget Committee of the Egyptian House of Representatives, Mostafa Salem, considered raising the interest rate by 1% an expected measure in light of external and internal factors affecting the Egyptian economy.

In a press statement, he attributed the interest rate hike to several factors, foremost of which is the Russian-Ukrainian war, which "affects the prices of petroleum and food materials, transport and shipping chains, and many commodities and the increase in inflation rates in all countries of the world," he said.

Geopolitical tensions and their impact on the global economy also played a role in the decision of the recent central bank, from Salem's point of view, pointing at the same time to the high rate of inflation domestically.

He pointed out that Arab countries such as Saudi Arabia and Kuwait have raised interest rates as a precautionary measure to support local savings and preserve the value of the local currency.

And the Undersecretary of the Plan and Budget Committee added, "Egypt is part of the world and we have a strong connection with global economies and economic decisions. Therefore, with the world heading to take action to raise interest rates to curb inflation that affected the global economy and affected Egypt, we had to take this measure."

According to a statement by the Central Agency for Public Mobilization and Statistics - governmental - the annual inflation rate in the country rose to 10% during the month of February, registering the highest rate since mid-2019.

The Statistics Authority stated that the annual inflation rate recorded 4.9% for the same month of the previous year, due to the increase in food prices by 20.1%, especially vegetables, fruits, bread and grains.

war bill

For his part, the economic expert, Abdul Nabi Abdul-Muttalib, explained that the negative repercussions of the Russian-Ukrainian war began to spread to the Egyptian market, considering the recent decisions of the Central Bank as one of those repercussions.

He refuted - in statements to Al Jazeera Net - the reasons that prompted the government to raise the interest rate and the dollar, explaining its fear of the exit of hot money from the Egyptian economy, so the central bank raised the interest rate to tempt those funds to stay inside the country.

The price of the local currency has also been reduced to be an obstacle to the dollar's exit from the Egyptian market, as the exit of foreign money increases the demand for hard currency, according to the economist.

Abdul Muttalib did not hide his fear of a wave of high prices extending to the prices of commodities, whether local or imported, as a reaction to the rise in the price of the dollar, especially since Egyptians are preparing to receive the month of Ramadan, which is accompanied by purchasing habits characterized by increased consumption and then increased prices.

He concluded his speech by saying, "The ball remains in the government's court to maintain price stability and not leave it to go unchecked, as happened with the first float of the flag of 2016."

In November 2016, the Egyptian government liberalized the exchange rate of the dollar against the pound, causing the local currency to lose about 57% of its value.

Fears of a crazy rise in commodity prices in Egypt (Al-Jazeera)

sterilization policy

In the same context, Mustafa Shaheen, a professor of economics at the American University of Auckland, explained the central bank's motives for taking its recent decisions, explaining that the main goal is to limit the purchase of the dollar.

And he went on, "What the Central Bank has done is called the policy of sterilization, as it raised the interest rate in order to reduce the Egyptians' rush to buy the dollar," but if the price of the hard currency rose above the interest rate ratios, this means the tendency to trade in the dollar on the part of some citizens, according to what he said. Academic specialist in economics.

And he warned - during his speech to Al-Jazeera Net - of the repercussions that the stabilization of the dollar price on the part of the central bank is only without the market, and added, "This will have severe repercussions on the economy and prices will rise insane, and we will face the phenomenon of retaining the dollar and speculating on hard currency."

What is more dangerous, according to Shaheen, is the scarcity of the dollar, whether artificially as a result of speculation on it, or in real as a result of its shortage in the Central Bank, which is expected to lead to a rise in the prices of medicine, equipment and machinery.