Goldman Sachs expects the Central Bank of Egypt to hike interest rates by up to 300 basis points at its March meeting.
Bloomberg said so the Central Bank of Egypt will make this decision after inflation far exceeded expectations in February.
The rate hike of this magnitude was a recent precedent in Egypt, as the country was also forced to devalue its currency three times in the past year.
The Central Bank of Egypt raised deposit rates by 300 basis points, the highest rate since 2016, to 16.25 percent in December 2022, and has maintained it ever since.
With regard to inflation expectations and, in particular, improving local currency liquidity to alleviate chronic pressure on the Egyptian pound, the Central Bank of Egypt will need to tighten monetary policy in the coming months, said Farouk Sousse, an economist at Goldman. Sachs in London, said.
Goldman Sachs has previously said it would not rule out an unplanned rate hike in response to pressures on inflation and the pound.
Following the latest inflation data, economists at Cairo-based NAEEM Brokerage Firm said an emergency meeting could precede a 200-300 basis point increase.
The fastest rise in inflation in more than five years has made Egypt’s official borrowing costs extremely negative when adjusted for inflation.
The real rate that was once the world’s highest is now nearly -16 percent, one of the lowest of the more than 50 major economies tracked by Bloomberg.
The Central Bank of Egypt’s Monetary Policy Committee was caught off guard by leaving rates unchanged last month and said it was assessing the impact of 800 basis points of increases in 2022.
The committee is targeting inflation of seven percent, plus or minus two percentage points, by the fourth quarter of next year.
But consumer prices rose 31.9 percent year on year in February, with food costs rising at a record pace.
The pound has lost almost half its value since March 2022 as Egypt struggles with its biggest foreign exchange shortage in years.
Egypt’s default rate rose last month to the highest rate in the world after Ecuador, and the bond market is showing signs of tightening again. Derivatives show the risk of further currency depreciation in the future.
These developments are a setback to the $470 billion economy, which began to stabilize following the International Monetary Fund’s deal in December by partially clearing the import backlog and picking up foreign exchange inflows.
A Bloomberg report said that Egypt lost bond investors’ confidence just two months after striking a deal with the International Monetary Fund and gaining investor confidence.
Doubts about Egypt’s progress in pursuing asset sales and its commitment to a more flexible exchange rate have pushed spreads on some long-term government bonds to nearly 1,000 basis points above US Treasuries – the minimum debt that should be considered defaulting.
Further evidence of investors’ concern 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.
