The Egyptian pound collapsed Thursday by over 15% to a record low of 22.7 against the US dollar after the Central Bank of Egypt (CBE) announced, in a special monetary policy meeting earlier in the day, its move to a flexible exchange rate regime and raised key interest rates by a whopping 200 basis points (bps) in a bid to stabilize prices over the medium term.
The sudden depreciation in the value of the Egyptian pound followed the CBE's move to a "durable flexible exchange rate regime" as it intensifies its reform agenda to secure macroeconomic stability, leaving the forces of supply and demand to determine the value of the Egyptian pound versus other foreign currencies in a bid to build up "sustainable, adequate levels of Foreign Exchange Reserves," the central bank said.
In the same policy meeting, the CBE hiked its overnight deposit rate, the overnight lending rate, the rate of the main operation, and the discount rate, setting them at 13.25%, 14.25%, 13.75%, and 13.75% respectively. The hawkish move comes as part of the bank's battle against inflation, which hit 15% in September, to ensure price stability over the medium term.
"Elevated global and domestic prices are expected to keep headline inflation above the MPC’s preannounced target of 7 percent (±2 percentage points) on average in 2022 Q4. The objective of raising policy rates is to anchor inflation expectations and contain demand-side pressures, higher broad money growth, and second-round effects of supply shocks," the central bank said in a statement.
The bank also announced it would gradually phase out a rule that mandated the use of Letters of Credit for import finance, with the completion of removal expected by December. The rule was put in place to preserve scarce dollars in the financial system, but caused a significant slowdown in industrial and consumer imports.
The Monetary Policy Committee (MPC) of the CBE said it would "continue to announce inflation targets along the predetermined disinflation path," and that it would closely monitor all economic developments with the aim of ensuring price stability.
