Egypt central bank should step in with more rate hikes, devaluation – Capital Economics

Egypt central bank should step in with more rate hikes, devaluation – Capital Economics

While the Central Bank of Egypt unexpectedly raised interest rates on Thursday, by 100 basis points (bps) to 19.25%, it still needs to do more in terms of rate hikes and devaluation, said Capital Economics in a note on Friday.

"With growing signs that the FX crunch is hurting economic activity, action will need to arrive sooner rather than later in order to avoid a messy balance of payments crisis," the London-based consultancy said.

The rate hike this week comes after Egypt's inflation hit an annual 35.7% in June. For July, the expansion is expected to reach a record 36.6% year-on-year (YoY).

The central bank has been targeting inflation of 5%-9% by Q4 2023.

Capital Economics said the CBE appeared to be managing the pound by rationing foreign currency but there are signs that this is now starting to disrupt economic activity.

"Soon enough, the CBE will need to act in order to curb the FX liquidity crunch. Policymakers will probably be forced to turn to another devaluation – for our part we think the pound will weaken another 12% to 35/$ by year-end. And crucially it will need to show a credible commitment to a more flexible exchange rate regime."

The devaluation is widely expected