CBE drives home jumbo 300 bps rate hike: The Central Bank of Egypt raised interest rates by 300 bps on Thursday — its biggest rate hike since 2016, before floating the EGP — as it looks to clamp down on rising inflationary pressures. The Monetary Policy Committee (MPC) hiked the overnight deposit rate to 16.25%, the overnight lending rate to 17.25%, while the main operation and disc. rates were raised to 16.75%, it said in a statement (pdf).

It’s a bigger hike than expected: Analysts we surveyed last week had penciled in a 200 bps rate hike. The CBE had raised rates by 200 bps before October’s devaluation — ahead of the IMF’s USD 3 bn bailout. The latest bump follows 500 bps worth of rate hikes this year, bringing interest rates 800 bps above the beginning of the year.

It all comes down to rising inflation: Inflation hit a five-year high of 18.7% last month as the CBE’s decision to float the EGP affected food and beverage prices. The MPC’s statement judges higher inflation rates and a recent hike in demand side pressures as accelerating faster than the economy’s capacity and fast growth of money supply. “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,” the statement added. The MPC also cites the uncertain outlook for commodity prices, the looming global economic slowdown and the impacts of the Russia-Ukraine war on global supply chains as further risks for inflation.

And the CBE has targets: The CBE is sticking with its current inflation target of 7% (± 2%) through to 4Q 2024, but wants to bring inflation down to 5% (± 2 percentage points) by 4Q 2026. The CBE is expecting 4Q 2022 to remain above the inflation target, the MPC said in the statement.

But the jumbo hike could also signal a further devaluation, analysts say: “I think Egypt will implement a further depreciation before 1 January,” Reuters quotes Arqaam Capital analyst Jaap Meijer as saying, adding that a “rate hike will make this easier now to ensure some capital inflows once the devaluation is implemented.” Goldman Sachs’ Farouk Soussa says a further devaluation will depend on the CBE’s ability to build a liquidity buffer that can clear the backlog of FX, Bloomberg reports. “The currency is still very fragile,” Meijer said on Bloomberg TV. “There’s significant room for devaluation,” he added.