Adjusting Egyptians’ Inflation Expectations

Source: Carnegie Endowment
Author(s): Brendan Meighan

Original Link:

The Central Bank of Egypt’s (CBE) decision to raise its interest rates by 2 percentage points on May 21, 2017 caught the Egyptian business community and investors by surprise. In a Reuters survey of economists following the Egyptian market conducted five days prior, all but one of the fourteen experts expected the central bank to hold rates steady. The central bank had already raised interest rates by 3 percentage points in November 2016, in conjunction with their decision to liberalize the foreign exchange market, which saw the Egyptian pound lose more than half of its value against the dollar.

The consensus among investors in the Egyptian marketplace was that interest rates were high enough to stem any outflow of foreign currency and clamp down on demand-driven inflation, and any further increase at this point would simply raise the cost of borrowing money for the private sector. However, in a surprise to many investors, the Egyptian authorities decided to raise the rates following a meeting with the International Monetary Fund (IMF) on May 11 regarding the second tranche of its $12 billion loan to Egypt…

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