Egypt Raises Interest Rates to Support Pound and Combat Inflation

Egypt's central bank announced a 100 basis point increase in interest rates on Thursday, raising the overnight deposit rate to 20% and the lending rate to 21%. The move comes as the Egyptian pound has depreciated by 9% against the US dollar since late September, driven by regional conflicts and rising commodity prices.

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) aims to anchor inflation expectations with this hike. The pound closed October at EGP 55.95 per dollar, which is stronger than its weakest level during the US-Iran conflict. The decision to raise rates comes despite a plausible scenario for a rate hold, given Egypt’s real interest-rate differential with the US is above 4%, and Treasury-bill yields had already risen by more than 50 basis points.

The CBE estimates that each 1% decline in the pound adds about 0.18 percentage points to inflation over 12 months. Annual headline inflation eased to 13.9% in September, while core inflation reached 14.1%. However, monthly headline and core inflation accelerated to 1.3% and 0.8%, respectively, from August.

The CBE expects output growth to remain near the 4.7% recorded in the second quarter, supported by manufacturing, services, and trade. It forecasts inflation to average 7%, plus or minus two percentage points, in the fourth quarter of 2027. The rate hike could also signal policy discipline to the International Monetary Fund as Egypt considers a successor to its Extended Fund Facility, which expires in December.

Further rate increases are anticipated. BMI, a Fitch Solutions company, expects another 100-basis-point increase in December, citing the risk of prolonged pressure on portfolio inflows and energy import costs.