Source: The Tahrir Institute For Middle East Policy
Author(s): Osama Diab
Last week, the Central Bank of Egypt (CBE) unexpectedly decided to raise interest rates by two percentage points to mitigate spiraling inflation. While academic economists and observers of financial markets hold a wide range of opinions about the likely effects of the rate hike (to say nothing of its wisdom), the high inflation in Egypt—cited by the CBE as the reason for the tightening—is undisputed. The peg of Egyptian pound (LE) to the dollar gave rise to a parallel black market over the past several years, and the gap between the official bank exchange rate and the black-market rate widened throughout 2016, until the peg was removed and the pound floated in November. The CBE’s decision to float the pound was controversial, not least because of the inflation it is perceived to have caused. However, contrary to popular belief, the incredible rise of the dollar against the pound was one of the results, not the cause, of high inflation. The fundamental cause of inflation is the increase in the money supply: the amount of Egyptian pounds in circulation has increased at unprecedented rates….
Read more at original link.