Egypt's central bank recently raised interest rates by 1%, a decision that caught some experts off guard. Dr. Hani Genena, head of research at Al-Ahly Faros, expressed surprise at the move, given the current economic challenges faced by some sectors, particularly the real estate sector. The sector has been experiencing weakness for about a year and a half to two years, alongside increased borrowing costs for the government.
Dr. Genena noted that the central bank had already tightened monetary policy, with real interest rates exceeding the inflation rate by around 5%. As a result, Al-Ahly Faros had been advocating for a tightening policy to limit import demand, especially with the rising dollar price against the pound. This approach aims to encourage exports and manage the economy.
The decision to raise interest rates, according to Dr. Genena, is in the right direction but was unexpected. He emphasized that the goal now is to restrict import demand, not through administrative measures, but by increasing borrowing costs. This natural reduction in consumption and investment will lead to lower import demand. The focus is on directing imports to essential goods like petroleum and food.
Dr. Genena discussed the 1% interest rate hike, suggesting that the concern about dollarization was not the primary factor. He cited the high basic interest rate in Egypt, around 20%, making a 0.25 or 0.5 point increase relatively limited in impact. In contrast, rate hikes in the United States have a more significant effect due to the lower basic interest rate of 3-4%.
The Egyptian economy faces consecutive shocks, including a current account deficit and trade balance issues due to the war, which may add $10-15 billion to the energy bill this year. Another shock is the tendency of foreign investors to hedge and reduce investments until the war ends. Dr. Genena believes the central bank aims to reduce imports to address the first shock.
The central bank's policy tightening and commitment to controlling inflation may encourage foreign investors to return. Dr. Genena mentioned that around $3.5 billion in foreign investments left in the previous two weeks, but there was a partial return afterward. He attributed this to the discount obtained by foreign investors due to the 10% decrease in exchange rates.
Dr. Genena highlighted that the decision's significant impact lies in the message it sends: Egypt will not ignore inflation shocks and will take necessary measures to control inflation. He also discussed the concept of central bank independence, which gives investors confidence in the bank's ability to make decisions based on its assessment.
Key points
- The Egyptian central bank's decision to raise interest rates aims to curb inflation and manage economic challenges.
- The move was unexpected but seen as a step in the right direction by some experts.
- The decision's impact is also linked to the message it sends about Egypt's commitment to controlling inflation.
