Can raising interest rates in Egypt curb high inflation rates?

There is a state of anticipation in Egypt for the meeting of the Monetary Policy Committee at the Central Bank tomorrow, Thursday, to discuss interest rates, amid expectations that they will be raised by 200 basis points. Will this step succeed in curbing high inflation rates?

Egypt’s core inflation for the month of February recorded its highest rate ever, at over 40% year-on-year.

In the midst of these figures, most analysts’ expectations indicate that interest rates will be raised by between 200 and 300 basis points at next Thursday’s meeting.

HSBC, Standard & Poor’s and Goldman Sachs expected the rate hike to 300 basis points.

While the bank “BNP Paribas” expected to raise interest between 2 and 3% in order to restore the attractiveness of bonds and treasury bills in local currency to foreign investors.

The agency, “Capital Economics,” expects to raise interest rates by 2.5% to curb inflation.

While Morgan Stanley came as the most conservative for the next meeting, expecting an interest rate increase of only 2% in Thursday’s meeting, with interest increases reaching 400 basis points by July.

These expectations are supported by the International Monetary Fund’s first review of its program with Egypt this month, amid the fund’s vision of how to control inflation.

In a virtual press conference last January, the head of the International Monetary Fund’s mission to Egypt, Ivana Hollar, explained that “the continuous depreciation of the currency at a time when global commodity prices are rising… has led to pressure on domestic prices and rising inflation.”

Hollar asked the Egyptian government to “restore price stability by tightening monetary policy… and to protect those at risk by supporting the budget directed to those in need.”

But does the Central Bank of Egypt think in the way analysts rely on a traditional rule, which is controlling inflation by raising interest rates? Going back to the Central Bank of Egypt’s meeting last February, it decided to keep interest rates unchanged, even though core inflation rates had exceeded 31% in January.

This is supported by some locals in Egypt for several reasons, including that raising interest will lead to an increase in the cost of debt for the government and will negatively affect the private sector and will not have a significant impact on inflation in light of the depreciation of the pound.

In addition, raising the interest rate will not lead to the return of foreign investments to Egyptian debt instruments in light of the current global conditions, as well as the state of uncertainty surrounding the Egyptian economy.