At its Monday currency auction, the Central Bank of Egypt (CBE) allowed the pound’s official exchange rate to reach LE8.85 per dollar. The CBE has held the pound at LE7.73 to the dollar since November.
Banks are allowed to resell dollars for an additional 10 piasters, bringing the exchange rate for consumers to LE8.95 per dollar.
The dollar’s black market value peaked at LE9.80 in the first week of March, but has eased to closer to LE9.25 this week.
Analysts predicted the move following a series of decisions last week that eased dollar deposit and withdrawal limits for individuals and importers. The bank was also likely encouraged by February inflation figures released last week. The annual rate hit a six-month low of 9.13 percent.
“The weakening of the pound will inevitably involve some short-term pain. Inflation is likely to rise,” said Jason Tuvey, Middle East economist at UK-based Capital Economics, in an emailed statement. “Higher inflation will erode households’ real incomes and weigh on consumer spending, which has been one of the key props to growth over the past few years.”
Tuvey estimates that each 10 percent drop in the value of the pound translates into an increase in inflation of 1.5-2 percentage points. He also predicts that the pound will continue to fall until it settles at around LE9.50 per dollar.
The likely increase in inflation could prompt the CBE to raise interest rates at the next meeting of the Monetary Policy Committee, scheduled for Thursday. A rate hike would raise borrowing costs for the government as well as private borrowers, but could also help constrain inflation. Capital Economics is now predicting a 100-basis point rate increase, bringing benchmark interest rates to 10.25 percent.
Despite the risk of higher prices, economists have been calling on Egypt to devalue the pound, arguing that it will allow the CBE to ease currency restrictions, encourage foreign investment in Egypt and boost the competitiveness of Egypt’s exports.
The market reacted positively to the news, with the EGX climbing by 6.7 percent to close the day at 7,003.85, the highest level in two months.