The move comes after the banking regulator raised interest rates by 600 basis points to curb inflation
The Egyptian pound plunged to a record low on Wednesday after the country allowed its currency to float freely and the central bank announced a huge interest-rate increase.
The pound plunged more than 26.5 per cent to 42 against the dollar in morning trading, having been fixed at about 30.9 against the greenback for the past year.
By early afternoon, it had dropped to 48 against the dollar.
Since 2022, Egypt has devalued its currency three times but maintained controls to fix the exchange rate each time.
Wednesday’s decision is the first time the currency will be allowed to freely trade on currency markets.
The move, which brought down the Egyptian pound to its lowest value in history, came after the Central Bank of Egypt raised its overnight interest rates by 600 basis points at an unscheduled meeting and said it would allow the market to determine the exchange rate.
The devaluation was an attempt to unify the country’s official exchange rate and the rate on its parallel market, the central bank said in a statement.
The black market rate had been double the official rate for the past few months, exacerbating a continuing foreign-exchange crunch that has crippled the country’s import-heavy economy.
“The CBE is committed to continue the transition to a flexible inflation targeting regime. To ensure a smooth transition, the CBE will continue to target inflation as its nominal anchor, allowing the exchange rate to be determined by market forces,” according to the bank.
Following the flotation, the black market exchange rate has been changing at a fast pace.
On Tuesday, a US dollar was trading at 42 Egyptian pounds on the black market, one trader told media, explaining that by Wednesday morning, it had increased to 58 pounds before receding slightly to 52 in the early afternoon.
“This sort of fluctuation, both in the official and parallel rates, is entirely expected now that the pound will be allowed to freely float. It will continue responding to various kinds of market stimuli until both rates unify, which is the main goal with this move,” says financial analyst Mohamed Ragab.
After the interest rate increase, the central bank’s overnight lending rate stands at 28.25 per cent while the overnight deposit rate is 28.25 per cent.
The central bank said the rate increase is aimed at lowering inflation, which hit a record high of 38 per cent towards the end of last year but has since eased to about 35 per cent.
Rates will remain unchanged until the desired inflation goals are achieved, it said.
The central bank’s Monetary Policy Committee had previously raised overnight rates by 200 basis points in its first meeting of this year in early February.
“Building on the decision … in February 2024, the Monetary Policy Committee decided to accelerate the monetary tightening process in order to fast-track the disinflation path and ensure a decline in underlying inflation,” the central bank said on Wednesday.
The rate increase is largely in line with what analysts predicted as several international financial institutions, including the Organisation for Economic Co-operation and Development, said 2024 would be a year of tight monetary policy in Egypt before a more pronounced economic recovery is achieved next year.
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