The move was the first under new Central Bank Governor Tarek Amer, who has led a drive to indirectly support the Egyptian pound and supply banks with dollar liquidity to cover imports despite dwindling foreign reserves.
“Given the balance of risks surrounding the inflation and GDP outlooks, the MPC judges that a rate hike is warranted to address inflationary pressures and anchor inflation expectations,” the central bank said in a statement.
At its scheduled meeting on December 17, the MPC took no decision on rates and said it would reconvene on December 24 following consultations with the government on inflation and growth.
Markets had been watching to see if Egypt would follow the lead of the U.S. Federal Reserve, which raised its key rate last week to a range of 0.25 to 0.5 percent.
Egypt’s central bank had been holding back for fear of choking off investment and growth and increasing the government’s already substantial debt servicing costs.
“A hike was not what we expected,” said Hany Farahat, economist at CI Capital.
“Maintaining rates unchanged would have been more convenient. This is not good news. It is going to increase the cost of lending for the private sector, which is not going to help fragile growth,” he added.
“A hike in interest rates is meant to provide support to the Egyptian pound but in my view it will have a negative impact on lending growth at a point when we need to stimulate investment.“
On Thursday the overnight deposit rate was raised to at 9.25 percent and the overnight lending rate to 10.25, the bank said in a statement.
The Arab world’s most populous state, which depends on imports for food and energy, has run short of hard currency since a 2011 uprising drove tourists and investors away. Reserves have almost halved to $16.4 billion.
Egypt has been facing mounting pressure to devalue the currency and has been rationing dollars to keep the pound artificially strong at 7.7301 pounds. It has indirectly raised interest rates and injected dollars into the banking sector to relieve the pressure on the currency.
In November the two top state banks raised interest rates on pound certificates by about 250 basis points, raising expectations that the central bank might raise interest rates and leading other lenders to follow suit.
“Obviously the pressure on the exchange rate is still there and the initial round was not sufficient to quell depreciation pressures, so they want the defence to be broad-based,” said Hany Genena, head of research at Pharos Securities Brokerage.
“Only a few banks participated in raising rates on the certificates of deposits. In my view what they did today is that they want to broaden the participation of banks in this defence mechanism.”
Egypt’s economy has been struggling with sluggish growth after more than four years of political instability. The government projects growth of around 5.5 percent this fiscal year, compared with an estimated 4.2 percent in 2014/15.
“The impact on growth and investment will only be negative if the defence is long-lived and if it is not promptly leveraged to execute long-awaited fiscal and foreign currency policy reforms,” Genena said.