Update on Egyptian Devaluation & Interest Rate Moves

Update on Egyptian Devaluation & Interest Rate Moves

The Central Bank of Egypt (CBE) took markets by surprise with a 14% devaluation of the Egyptian pound on 14 March. The new rate was $1 = EgP 8.85. At the same time, the Central Bank announced that it would be taking a 'more flexible' approach to managing the exchange rate and that it would target international reserves of $25 billion during 2016. (CBE press release 14 March.) Reserves were $16.5 billion at the end of February, according to Central Bank figures.

On 17 March the Central Bank increased its overnight deposit rate by 1.5% to 10.75% and its overnight lending rate by the same amount to 11.75%. On 24 December 2015, the Central Bank had raised rates by 0.5%, the first interest rate rise since mid-2014. In its 17 March press release, the Central Bank said that monetary policy would be geared towards avoiding 'double digit inflation rates over the medium term.' It said that the headline inflation rate had reached 9.1% in February 2016, and the core inflation rate 7.5%. The press release added that the Central Bank would not hesitate to adjust rates to ensure price stability.

On 20 March, the Central Bank announed that going forward it would hold a single weekly foreign exchange auction on Tuesdays, rather than three weekly auctions, as it had previously been doing.

In February, the Central Bank closed down four foreign exchange companies. The Central Bank had been allowing foreign exchange companies to sell dollars a little above the official rate, but it was concerned that some companies had been abusing this privilege to sell at prices materially above the official rate.

The Egyptian stock market index has risen by about 20% in the last month. It began falling from around 9,000 in mid-2015, reaching around 5,000 in mid-January 2016. It began rising in early March, two weeks before the devaluation. 

Tarek Amer was appointed Central Bank Governor in November 2015 amid continuing pressure on the exchange rate and concerns about inflation.