Egypt’s central bank holds interest rates steady after governor's shock resignation

Hassan Abdalla was named as Tarek Amer's replacement on Thursday

Egypt's central bank building in Cairo. The regulator has an inflation target rate of 5 per cent to 9 per cent. Reuters
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The Central Bank of Egypt kept interest rates steady on Thursday, despite soaring inflation, one day after its governor, Tarek Amer, resigned in a shock announcement.

The bank’s monetary policy committee (MPC) kept its overnight deposit rate at 11.25 per cent, its overnight lending rate at 12.25 per cent and the rate of the main operation at 11.75 per cent.

The discount rate was also kept unchanged at 11.75 per cent.

“The MPC decided that keeping policy rates unchanged remains consistent with achieving price stability over the medium term,” the central bank said.

“The MPC treats the developments emanating from the [Russian-Ukrainian] conflict to be among the exogenous shocks that are outside the scope of monetary policy and yet may lead to transitory deviations from pre-announced target rates.”

President Abdel Fattah El Sisi appointed Hassan Abdalla, a financier and chairman of one of the country’s largest media groups, as acting central bank governor on Thursday.

Mr El Sisi accepted Mr Amer’s resignation and appointed him as a presidential adviser, according to a statement from the presidency on Wednesday.

The majority of analysts had expected an interest rate increase but many shifted their forecasts after news of Mr Amer’s resignation amid uncertainty surrounding the country's next central bank governor.

Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes, altered the investment bank’s call to “hold” from an earlier expectation of a 100 basis points increase.

“The fundamental merits of a hike still exist, with inflation on the rise in July following a hike in fuel prices, including the first hike in diesel prices in three years,” he said.

“The continued weakness in the USD-EGP and expectations of further weakening are also impacting inflation expectations, therefore requiring a hike, in our view.”

The Arab world’s most populous country has faced mounting economic pressure since Russia’s invasion of Ukraine in February.

Foreign currency reserves have decreased over the past five months to $31 billion, from about $41bn.

Egypt’s annual core inflation rate increased to 15.6 per cent in July, from 14.6 per cent in June, central bank figures show.

The central bank has an inflation target rate of 5 per cent to 9 per cent but said in June that it would tolerate a higher level until after the fourth quarter.

However, consumers are feeling the pressure. Egypt’s annual urban inflation rate accelerated to 13.6 per cent in July, from 13.2 per cent in the previous month, driven by rising food prices and a local leap in fuel costs, according to the local statistics agency Capmas.

The central bank has played a key role in the balancing act to control inflation and support its currency, while raising the competitiveness of Egypt's exports and winning back foreign investors.

In an unscheduled extraordinary meeting in March, the central bank raised interest rates by 100 bps to attract foreign investment after billions of dollars flowed out of Egypt. It also devalued its pound by about 15 per cent.

At the time, the bank said it was “keen on safeguarding the achieved macroeconomic stability” and stressed “the importance of the exchange rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness”.

Then, in May, it raised interest rates by 200 points to contain double-digit inflation caused by rising international commodity prices and further supply chain disruptions.

In June, the committee kept rates unchanged, taking note of its increases in the previous two meetings.

“The path of future policy rates remains a function of inflation expectations, rather than of prevailing inflation rates and, as such, [the MPC] will not hesitate to adjust its stance to achieve its price stability mandate,” the central bank said.

Egypt has been in negotiations with the International Monetary Fund for a loan since March.

However, but the Washington-based lender said last month the country must make “decisive progress” on fiscal and structural reforms first. It has also encouraged a more flexible exchange rate.

Analysts say the pound is still overvalued and has further to fall, forecasting it to reach about 21 to the dollar, from the current rate of about 19 by the end of the year.

“With pressure mounting on the pound, we still think interest rate hikes will come back on to the agenda over the coming months,” Jason Tuvey, senior emerging markets economist at Capital Economics, said in a note following the central bank’s meeting.

The economic research business forecasts that the currency will weaken to 25 to the dollar by 2024, accompanied by at least 150bps of additional tightening by the end of the year and an IMF deal.

Mr Amer had chaired the central bank since November 2015 and his second four-year term was supposed to end in November 2023.

In a note, Mr Amer said he resigned “to leave room for new blood to take responsibility and push forward Egypt’s successful development process under the leadership of the president”, state-run daily Al Ahram reported.

Mr Abdalla is chairman of United Media Services, an Egyptian conglomerate that owns several media outlets, and former chief executive of the Arab African International Bank.

He is also founder and chairman of Panther Associates, a financial advisory company.

It is unclear how long Mr Abdalla will be at the helm of the central bank. The monetary policy committee will next meet in September and Egypt’s constitution allows for an interim governor until the House of Representatives reconvenes in October.

Updated: August 18, 2022, 4:33 PM