CAIRO - 13 August 2023: Capital Economics projects that the Egyptian pound will depreciate to 35 per dollar by the close of 2023, marking a 12 percent devaluation from its current rate of 30.95 per dollar.
However, the report emphasizes that the risks are skewed towards the downside, clarifying that while the devaluation might not necessarily lead to increased inflation, it will maintain an elevated inflation environment.
In relation to the recent decision on interest rates, the report states that Egypt's central bank surprised the market by implementing an unexpected interest rate hike. This move has been positively embraced by investors as a signal that policymakers are returning to a more orthodox economic approach.
The sudden 100 basis point hike, raising the rates to 19.25 percent, took the majority of analysts, including Capital Economics, by surprise, as the consensus had anticipated rates to remain unchanged for a third consecutive meeting.
On August 3, the Monetary Policy Committee of the Central Bank of Egypt voted to raise interest rates by 1 percent. This led to a 100 basis points increase in the overnight deposit and lending rates, setting them at 19.25 percent, 20.25 percent, and 19.75 percent respectively. Additionally, the credit and discount rates saw a 100 basis point elevation to reach 19.75 percent.
Capital Economics suggests that the central bank's decision was underpinned by the urgency to curb inflation, showcasing officials' heightened focus on combating rising inflation. The market reacted positively to this move, as Egypt's dollar bond spreads tightened by approximately 30 basis points since the announcement.
Yet, the report highlights the ongoing need for the central bank to take more measures to subdue inflation and regain the confidence of both investors and the International Monetary Fund (IMF).
The report argues, "Policymakers have more work to do to reinforce their commitment to orthodoxy. The key test will be what happens to the pound. With the strain from FX shortages mounting, officials will need to move soon to devalue the currency and adopt a more flexible exchange rate. That will keep inflation elevated and we think the central bank will need to deliver further interest rate hikes. Failure to deliver would leave Egypt at risk of a messy balance of payments crisis and sovereign default."
Capital Economics anticipates an additional 200 basis points increase, reaching 21.25 percent, in interest rates by the year's end.
As for inflation, the Central Agency for Public Mobilization and Statistics (CAPMAS) disclosed earlier in August that the annual inflation rate surged to 38.2 percent in July 2023, marking a substantial rise from 14.6 percent in July 2022.
CAPMAS reported that Egypt's consumer price index reached 181.1 points in July 2023, registering a 2 percent uptick compared to June 2023.
Additionally, CAPMAS data revealed a decline in the monthly inflation rate, receding from 2.1 percent in June to 1.9 percent in July. Urban consumer price inflation for Egypt rose to 36.5 percent year-on-year in July, up from 35.7 percent in June.
Furthermore, Egypt's core inflation rate, which eliminates certain volatile categories, was reported by the Central Bank of Egypt (CBE) to be 40.7 percent in July 2023, slightly down from 41 percent in June 2023.
CBE data also indicated that Egypt's core Consumer Price Index (CPI) recorded a monthly growth rate of 1.3 percent in July 2023, a decrease from the 1.5 percent of the previous year, and the 1.7 percent of July 2022.