The Central Bank of Egypt adopts a flexible exchange rate system and raises interest

 

Cairo - Eco - Fady Labib :  The global economy faced multiple shocks and challenges, the likes of which have not been seen in years. Recently, global markets have been subject to the COVID19 pandemic that put the world on lockdown, followed by the Russo-Ukraine conflict, which had dire economic ramifications. Consequently, Egypt weathered large capital outflows and rising commodity prices ...

Against this backdrop, Egypt is intent on intensifying its reform agenda to secure macroeconomic stability and achieve strong, sustainable and inclusive growth. To this end, the Central Bank of Egypt (CBE) moved to a durably flexible exchange rate regime, leaving the forces of supply and demand to determine the value of the EGP against other foreign currencies, while prioritizing the primary goal of achieving price stability, and building up sustainable, adequate levels of Foreign Exchange Reserves.

To that end, the CBE will begin the process of gradually repealing Letter No. 49 of February 13th, 2022 that mandated the use of Letters of Credit for import finance, and the CBE will ensure the completion of removal by December 2022. This will serve as a catalyst for the rejuvenation of economic activity in the medium term. Additionally, the CBE will work towards building the foundation for a derivatives market to further deepen the foreign exchange market and enhance its liquidity.

Furthermore, in order to uphold the CBE’s mandate of ensuring price stability over the medium term, the Monetary Policy Committee (MPC) has decided in its special meeting to raise the overnight deposit rate, the overnight lending rate and the rate of the main operation by 200 basis points to 13.25 percent, 14.25 percent, and 13.75 percent, respectively. The discount rate was also raised by 200 basis points to 13.75 percent.

Elevated global and domestic prices are expected to keep headline inflation above the MPC’s preannounced target of 7 percent (±2 percentage points) on average in 2022 The objective of raising policy rates is to anchor inflation expectations and contain demand side pressures, higher broad money growth and second round effects of supply shocks.

To further anchor inflation expectations, the MPC will continue to announce inflation targets along the predetermined disinflation path that began in 2017, which was on track until the emergence of the recent global shocks. Achieving low and stable inflation over the medium term supports real incomes and sustains the achieved competitive gains of the Egyptian economy.

The CBE will continue to closely monitor all economic developments and will not hesitate to act in order to ensure price stability.