The Central Bank of Egypt raised its key interest rates by 1 percentage point on Thursday, Oct. 29, lifting the overnight deposit rate to 20% and the overnight lending rate to 21%, a move that ran against market expectations and came as the Egyptian pound slid to record lows near 56 per dollar.

The main operation rate and the discount rate both rose to 20.5%, the bank said. The decision ended a run of five consecutive holds by the Monetary Policy Committee that began on April 2, and it was the first increase since March 2024, banking expert Mohamed Abdel Aal told Daily News Egypt. For foreign investors who buy Egyptian Treasury bills for their yield, the hike adds to already high local yields and signals that Cairo is prepared to defend the currency with rates rather than let inflation reaccelerate.

Why the Central Bank of Egypt turned hawkish

In its statement, as summarized by Daily News Egypt, the committee called the increase pre-emptive. It said the aim was to keep annual inflation falling and to hit its target of 7%, plus or minus 2 percentage points, on average in the fourth quarter of 2027.

The bank pointed to an unfavorable external backdrop. Commodity prices had risen broadly, it said, especially energy and farm goods, as regional tensions disrupted supply chains. It listed three main risks to its outlook: a regional conflict lasting longer than expected, tighter global financial conditions, and a bigger-than-planned price impact from the government's own fiscal consolidation measures.

The domestic picture was mixed. Preliminary central bank estimates put third-quarter growth close to the 4.7% recorded in the second quarter, with manufacturing, services and trade leading. The committee said output was still below potential and would approach it in the second half of 2027.

The move caught markets off guard. All 11 financial institutions and investment banks in a survey by Asharq Bloomberg had expected rates to stay unchanged, with the deposit rate at 19%, Daily News Egypt reported on the eve of the meeting. Abdel Aal had called a hike relatively unlikely. Saudi daily Al Eqtisadiah also described the hike as contrary to most analysts' expectations.

Inflation slows on paper, but monthly prices jump

The hike came despite headline numbers that looked benign. Annual urban inflation slowed to 13.9% in September from 14.5% in August, according to central bank data, and core inflation eased to 14.1% from 14.9%. Non-food inflation fell to 18%, its lowest since January 2023.

Month-on-month figures told a different story. Urban prices rose 1.3% in September after 0.1% in August, and monthly core inflation climbed to 0.8% from 0.3%. Food prices jumped 2.8% on the month, led by a 17.8% rise in fresh vegetables, while poultry rose 4.9%. Annual food inflation picked up to 7.2% from 6.3%.

The currency is the other pressure point. On Oct. 26, the dollar traded at 55.75 pounds for selling at the National Bank of Egypt, Banque Misr and other large lenders, Egypt Independent reported. Heba Mounir, an analyst at HC Securities & Investment, told Daily News Egypt that the pound had lost about 14% against the dollar since January and about 5% in October alone, breaking below its April low of 54.73.

Banking expert Hany Aboul Fotouh told Al-Masry Al-Youm that the dollar approaching 56 pounds was a key trigger for the decision, because a weaker currency raises the cost of imported food and production inputs. He also tied the move to keeping local debt attractive to foreign investors and limiting outflows of so-called hot money.

Egypt's five-year credit default swap spread had widened to 343 basis points before the meeting, from a 2026 low of 262 basis points on Aug. 28, according to Mounir. She also noted that net international reserves stood at a record $57.3 billion at the end of September.

Higher yields for foreign bond buyers

Rates on variable-rate savings certificates and loans tied to the central bank's benchmarks rose by the same 1 point immediately, and banks were set to review fixed deposit and lending rates from Sunday, Nov. 1, Daily News Egypt reported. The National Bank of Egypt's Platinum certificate and Banque Misr's Al Qimma certificate are among the floating-rate products affected.

The first test of foreign appetite comes through this week's government debt sales. The central bank, acting for the finance ministry, scheduled 110 billion pounds of Treasury bills on Sunday, split between 91-day and 273-day paper, followed by four bond auctions on Monday worth 27 billion pounds in maturities from 18 months to five years.

Egypt now sits apart from most of its large African peers. Nigeria's central bank cut its policy rate by 350 basis points to 23% in September, while South Africa's Reserve Bank raised its repo rate by 25 basis points to 7.25%, BusinessDay reported. In Asia, the shift toward tightening has been wider, with Pakistan raising its policy rate to 12% as oil and wheat costs kept inflation high, part of a regional pattern Capital Times tracked in its central bank tightening scorecard.

The committee gave no guidance on its next step. It said it would keep assessing conditions in light of economic developments and the expected inflation path. The October inflation figures will show whether September's monthly jump was a seasonal spike or the start of a new trend.