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Preparing for Higher Interest Rates: Egypt Takes Action

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Goldman Sachs expects Egypt’s central bank to raise interest rates to 300 basis points when it meets later this month.

Bloomberg reported that Egypt’s central bank will make the decision after inflation far exceeded expectations in February.

An interest rate hike of this magnitude was a recent precedent in Egypt, which has also been forced to devalue its currency 3x over the past year. Egypt’s central bank raised its interest rate on deposits by 300 basis points, the highest rate since 2016, to 16.25% in December last year but has maintained it since then.

Curbing inflationary expectations and, in particular, improving domestic foreign exchange liquidity to ease chronic pressure on the Egyptian pound, said Farouk Sous, an economist at Goldman Sachs in London, will require the Egyptian Central Bank to pursue a tighter monetary policy in the coming months.

Goldman Sachs has previously said that it does not rule out an unscheduled increase in interest rates in response to pressure on inflation and the British pound.

Cairo-based Naim Financial Brokerage economists said after the latest inflation data that an “emergency meeting” could precede a 200-300 basis point hike.

The fastest rise in inflation in more than five years has sent Egypt’s official inflation-adjusted cost of borrowing very negative. The real rate, once the highest in the world, is now close to minus 16%, one of the lowest rates among more than 50 major economies tracked by Bloomberg.

The MPC was caught off guard by leaving rates unchanged last month, saying it estimates the impact of an 800 basis point hike in 2022. It targets inflation at 7% plus or minus 2 percentage points by the fourth quarter of next year. .

But consumer prices rose 31.9% year-on-year in February, with food prices rising at a record pace. The pound has lost nearly half its value since March last year as Egypt struggles with its worst foreign exchange shortage in years.

Egypt’s default insurance ratio rose to the highest level in the world since Ecuador last month, and the bond market is showing signs of tightening again. Derivatives show the risk of further currency depreciation in the future.

The developments are a setback for the $470 billion economy, which began to stabilize after an agreement with the International Monetary Fund in December, partially clearing import debt and attracting foreign exchange inflows.

Egypt lost investor confidence in bonds just two months after making a deal with the International Monetary Fund and gaining investor confidence, a Bloomberg report said.

Doubts about Egypt’s progress in disposing of assets and its commitment to a more flexible exchange rate have led to margins on some long-term government bonds nearly 1,000 basis points above US Treasuries, the minimum debt that should be considered defaulted. Another indication of how worried investors are is that the cost of insuring the country’s debt against default is about 1,185 basis points, up from a nine-month low of 720 basis points in January.

Source: Bloomberg

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