Bloomberg, by Mirette Magdy
Egypt’s central bank left interest rates unchanged but raised the reserve ratios for lenders -- an indirect form of tightening that avoids increasing debt-servicing costs for one of the Middle East’s most indebted nations.
The Monetary Policy Committee maintained the deposit rate at 11.25% and the lending rate at 12.25%, it said Thursday in a statement. A majority of economists surveyed by Bloomberg expected a hike of 50 to 100 basis points.
The regulator also increased the amount of money that commercial lenders must set aside as part of their mandatory reserves, a move that’s likely to prop up the currency by withdrawing liquidity from the financial system.
The hike of required reserve ratios to 18% from 14%, suggests “the central bank isn’t keen on raising policy rates at this stage and therefore opted to tighten through another tool,” said Mohamed Abu Basha, head of macroeconomic research at investment bank EFG Hermes.
The bank’s second MPC meeting since Hassan Abdalla took the helm came as investors sought signs of how the country aims to tackle an economic crisis caused by the knock-on effects of the Russian invasion of Ukraine, and manage a currency that’s under increasing pressure.
Consumer Pain
Egypt is wrestling with annual inflation that’s at its highest in about four years, piling pain on consumers in a country of more than 100 million people, where around half live around or below the poverty line. Authorities made a combined 300 basis points of rate hikes in March and May, which the central bank said are still “transmitting through the economy.”
The current key rates “coupled with the increased required reserve ratio are consistent with achieving price stability over the medium term,” it said.
Holding rates, while preventing an upsurge in debt-servicing costs for authorities, may reflect a shift by the North African nation to lessen its reliance on foreign investors in domestic bonds and bills and focus more on investment and boosting exports.
Months of quickening price gains have turned Egypt’s official borrowing costs negative when adjusted for inflation, and a real rate that was once the world’s highest had slipped below emerging-market peers such as South Africa and Indonesia. The country has seen $22 billion of foreign outflows from the local debt market since March.
A new agreement with the IMF, the subject of months of talks, could restore investor confidence. Finance Minister Mohamed Maait told Bloomberg on Wednesday that Egypt hopes to reach a deal within one or two months, although the loan amount is yet to be determined. Possible financing from Japan and China is also on the table.
An Egyptian official has recently signaled the government now favors a more flexible currency to support the economy. The pound was devalued by about 15% in March, although economists say it needs to fall further. Derivatives traders are stepping up bets on another drop.
— With assistance by Harumi Ichikura, Tarek El-Tablawy, and Abdel Latif Wahba
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