The Central Bank of Egypt (CBE) did it! The Monetary Policy Committee (MPC) raised policy rates last Thursday night by 200 basis points (bps), mostly matching economists’ estimates. Investors will now start to wonder what is next. 

Whether the CBE is done with rate hikes (or not) depends on how effective its latest monetary tightening moves have been so far since early 2022, be it more than doubling interest rates by hiking a cumulative 10 percentage points (pp) or raising banks’ required reserve ratio by 4pp to 18%. The current high inflation levels are not demand-driven but rather fueled to a large extent by a stronger US dollar vis-à-vis the Egyptian pound (i.e. imported inflation). But by hiking rates, the CBE is trying to avoid adding fuel to the fire. In other words, hiking rates will not likely take prices on a disinflationary path but will rather contain inflation from spiraling out of control, which I think will average more than 30% in 2023.

Meanwhile, local investors, mainly banks, will likely exhibit higher interest in Egypt’s debt market, since the probability of hiking rates is now much lower. However, foreign investors will likely continue to shrug off Egypt’s currently-lucrative local debt market because the FX risk can easily shave off those high yields. Foreign investors often double down on both high yields and FX gains from a strengthening local currency, but the latter bit is still missing in Egypt. So what about the FX rate, one may ask? This is like asking what the CBE’s governor will eat for Iftar today. What the CBE will do with the FX rate is anyone’s guess. But the FX rate will depend, among other factors, on the speed and magnitude of foreign direct investments (FDIs) from the GCC in some of the 32+ state-owned companies that are up for grabs.

Does this mean a third double-digit devaluation à la the March 21st and October 27^th moves of last year is not expected? While this is up in the air, I do not think another double-digit devaluation will do the trick. It is like moving higher in price along a perpendicular USD supply curve. Raising the FX rate will not increase the supply of US dollars in the market. By now, I think the monetary policy has done enough already. In my opinion, it is now up to the fiscal policy to kick in. This means it is time to walk the talk and deliver on the promised government offerings program in earnest.