Egypt’s central bank is expected to raise interest rates on Thursday, a Reuters poll showed, in an attempt to defend the pound after the central bank devalued the currency and said it will adopt a more flexible exchange rate policy.
Egypt has been facing a foreign currency shortage since the 2011 uprising drove away tourists and foreign investors—major sources of hard currency. Reserves more than halved from 2011 to $16.5 billion in February.
On Monday the pound was devalued to £8.85 per dollar from £7.73 pounds and the central bank injected hundreds of millions of dollars through exceptional auctions this week in an effort to crush a black market in dollars.
All 10 contributors to the Reuters poll said they expect the monetary policy committee to raise rates on March 17 in an attempt to defend the pound after the devaluation, with forecasts ranging from a 50 basis point hike to a hike of 100 basis points.
Bankers said the black market for dollars has sucked up foreign exchange liquidity from banks and put pressure on the pound but the central bank has recently been taking measures to divert liquidity back into the banking system.
This month the central bank eased capital controls that were imposed in February 2015 and last month the country’s main three state-owned banks launched dollar-denominated certificates of deposit aimed at Egyptians living abroad.
On Monday Egypt’s top two state banks, the National Bank of Egypt and Banque Misr, also said they would offer Egyptian pound investment certificates with a 15% yield in return for foreign currency.
Markets Prepare
In anticipation of an interest rate hike, yields on Egyptian treasury bonds jumped aggressively on Monday, following news of the devaluation.
Since taking over in November, Central Bank Governor Tarek Amer had taken measures to defend the pound. The MPC hiked interest rates by 50 basis points in December, citing inflationary pressures but kept it stable at the following meeting in January.
On Jan. 28 the central bank’s Monetary Policy Committee kept its overnight deposit rate at 9.25% and the overnight lending rate at 10.25% as it tried to balance inflationary pressures with the need to stimulate the economy.
Annual urban consumer inflation eased for the second consecutive month to 9.1% in February from 10.1% in January.
“Although inflation dropped last month, I think the next MPC meeting will result in a hike in interest rates to curb inflation expectations resulting from the 14.5 percent devaluation,” Farahat said.
