What’s next for Egypt after the US Fed’s interest rate hike? – Economy – Business

The Fed’s decision, which aimed to reduce the economic stimulus that has contributed to rising price pressures, is expected to affect emerging markets by encouraging capital flight, raising sovereign debt rates and destabilizing their currencies. , according to observers.

“The Fed’s decision to raise the interest rate generally affects emerging markets negatively,” Ahmed Moaty – a financial market expert – told Ahram Online.

The Fed, which last raised rates by half a point in 2000, normally raises interest rates by a quarter of a percentage point.

Medhat Nafei – economic expert and adviser to the Minister of Supply and Internal Trade – noted that the Fed’s decision means “more pressure on emerging markets, which will have to repay their debts and interest in a relatively more expensive dollar “.

These countries will also have to borrow again to repay their debts with higher interest rates, Nafei explained on his official Facebook page.

The rise in the dollar exchange rate also affects the imports of these countries and increases the trade balance deficit, especially in the case where a state depends on the import of basic necessities from abroad.

Following this decision, foreign investors who have invested in emerging markets to take advantage of higher rates of return should transfer their funds to the American market to benefit from the increase in the value of the dollar and the rise in rates, said noted Moaty.

“More trade balance deficit surely means weaker national currencies against the dollar; this will complete the noose,” Nafei wrote.

Egyptian response expected

While the Fed’s decision to raise the interest rate negatively affects emerging markets, its impact differs from country to country, Moaty said, expecting the Fed’s latest decision to have an impact. “very slight” impact on the Egyptian economy, “although the question is still open”. not clear.

In Egypt, experts meanwhile assume that the CBE will raise interest rates again by 0.5 to 1.5 percent. While experts differed on the expected rate of increase, they agreed that the aim would be to avoid a possible decline in the real interest rate amid soaring inflation.

Over the past few days, the central banks of many countries, including the UK, Saudi Arabia, the United Arab Emirates, Kuwait and Qatar, have announced interest rate hikes alongside the recent decision. from the Fed.

Moaty expects the CBE to raise the interest rate by 0.5 to 1 percentage point or leave it unchanged at its next meeting, noting that the CBE depends in its decision on economic figures and indicators rather than Fed decisions.

“The situation [in Egypt] is contrary to the Gulf countries and the UK, whose central banks immediately make interest rate decisions based on the Fed’s decision,” Moaty said.

“The CBE will wait after the Fed’s decision to verify whether huge foreign funds have been withdrawn from the Egyptian market and whether this has a significant impact on the economy,” Moaty said.

The CBE’s likely decision to raise the interest rate will be aimed at tackling inflation in Egypt and curbing the possible withdrawal of foreign funds from the country.

Although it is difficult to predict the bank’s next move, it is likely that it will implement a further interest rate increase to avoid a decline in real interest rates amid a sharp rise in l inflation, Nafei said.

In addition, Moaty said that Egypt has already taken action since last month, including an interest rate hike by the CBE based on the Fed’s earlier announcements to raise the interest rate to several times this year.

A few days after the Fed’s previous decision to raise interest rates by 0.25% in mid-March, the CBE raised its key interest rates at an unscheduled meeting by 1% for the first times since 2017 and set a meeting for May 19 to discuss a further tariff adjustment.

Following the CBE decision, the trading price of USD registered a record increase of EGP 17.4 when buying and EGP 17.5 when selling in local banks, before the pound Egyptian currency plunges to its lowest value in nearly five years against the USD, with the USD currently trading for EGP 18.5.

At the time, the bank attributed its decision to global inflationary pressures caused by the COVID-19 crisis and the recent Russian-Ukrainian conflict, which has driven inflation around the world higher since Feb. 24.

In February, Egypt’s inflation rate hit its highest level in nearly 30 months to exceed the original CBE inflation target of 7% (±2 percentage points) by the end of 2022.

According to the Central Agency for Public Mobilization and Statistics, the country’s annual headline inflation jumped to 10 percent in February from 8 percent in January, mainly due to a significant rise in food and drink prices.

In addition to raising the interest rate, the Fed announced its intention to reduce its portfolio of assets by $9 trillion starting next month and indicated that it intended to impose a series of additional half-point increases throughout 2022.

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Stephen V. Lee