Egypt's central bank liberalized its foreign exchange market, with immediate effect, and raised its key policy rate by 300 basis points as part of a major reform program aimed at tackling persistent shortages of foreign currency and making the country's economy more internationally competitive.
In a surprise announcement, the Central Bank of Egypt (CBE) said it had set a non-binding foreign exchange rate to "serve as soft guidance to jumpstart the market," abolished its list of priority imports, will allow banks to operate until 9 p.m. every day to conduct foreign exchange transactions, and will hold multiple auctions to support the process of price formation.
Banks will be at liberty to quote and trade at any exchange rate and the central bank will use the prevailing market rate for its transactions, the CBE said.
By raising its key policy rate by 300 basis points to 14.75 percent, the CBE has now raised its rate by 550 points this year to tackle rising inflation and ensure price stability, its main objective.
"For this purpose, the CBE will closely monitor the amount of reserve money in the system and continue to rely on indirect monetary policy tools," the CBE said, adding that it will introduce deposit auctions with longer maturities at market rates.
In addition, the CBE said it had also agreed with the finance ministry to "gradually phase out the monetary financing of the budget deficit over the coming months," a move that is consistent with the government's efforts to lower the budget deficit and debt.
"The CBE will continue to monitor all economic developments and will stand ready to mobilize all tools in order to ensure price stability," the central bank said.
Egypt's inflation rate eased to 14.1 percent in September from a 2016-high of 15.5 percent in August as the government implemented reform measures, such as a cut to energy subsidies and a Value-Added-Tax (VAT).
The central bank already devalued the Egyptian pound by almost 14 percent in March to create a more favorable investment climate and attract capital flows in an effort to relieve years of foreign currency shortgage.
Today the pound was trading at 8.896 to the U.S. dollar, down only around 1 percent from around 8.8 prior to its announcement and around the level it has been trading at since March.
