The Central Bank of Egypt will likely raise its key borrowing costs to the highest level in more than a decade, as it tries to curb surging consumer prices amid growing speculation of another currency devaluation to ease the country’s dollar crisis, according to Bloomberg, which constantly tracks Egypt’s economic performance.
According to the median estimate in a Bloomberg survey, the Monetary Policy Committee will raise the benchmark overnight deposit rate by 50 basis points to 12.25 %, the highest since at least 2005. Four of seven economists predict an increase, ranging from 25 to 100 basis points, while none forecast a cut. Inflation accelerated to 15.5 %in August, the highest level since at least 2009.
Egypt is seeking a $12 billion International Monetary Fund (IMF) loan to finance a government program that seeks to restore investor confidence. But steps including lower electricity subsidies, a new value-added tax and weaker currency risk are “exacerbating Egypt’s economic hardship, at least initially, because they are expected to push inflation even higher,” said Bloomberg.
Reham El Desoki, senior economist at Dubai,-based Arqaam Capital said,”Higher inflation will be the cost of aggressive reforms in the short term, and we believe it a reasonable price to pay for much needed policy actions lifting the overhang on Egypt’s economy.”
The bank may raise rates by one to three percentage points “to attract investors and help curb inflation stemming from the fiscal reforms, and from a devaluation that we expect to happen soon,” she said.
In March,the central bank raised borrowing costs by 1.5 %points – days after it weakened the Egyptian pound by 13% and promised to adopt a more flexible exchange regime – as part of a strategy to attract foreign investors. It increased the benchmark by another percentage point in June.
However, the measures haven’t led to the return of even a small portion of the more than $10 billion of foreign-held treasuries withdrawn from the country following January Revolution in 2011 against Hosni Mubarak. Egypt’s foreign reserves of $16.6 billion are still about 50 %below their pre-2011 levels, while the pound has been trading on the black market at about a 30 %discount to the official rate against the dollar.
“That’s led to speculation the bank is preparing a repeat dose,” as predicted by Bloomberg.
The new VAT will add about 2 % points to inflation, and Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes who predicts a rate increase of 50 basis points said the the central bank may “want to lay the ground for an upcoming Egyptian pound adjustment” as the government closes in on the IMF deal.
According to Bloomberg, citing official data, “Higher rates will put further pressure on the state budget, where interest payments already account for about a third of expenditure and about 67 %of tax income.” Average yields on Egypt’s 12-month notes rose to 16.4 %this week, the highest since Bloomberg started tracking the data in 2006.