Some great, easy to digest, jargon-free research that readers should get acquainted with is coverage from Capital Economics and their economists based in London. Their latest piece was on Egypt’s central bank decision to hold interest rates for the fifth consecutive time this year.
Political instability that keeps putting pressure on Egypt’s balance of payments (this is literally the balance of inflows and outflows) was behind the “unsurprising” decision, Said Hirsh of Capital Economics writes.
“Although the economy is weak and inflationary pressures have subdued … the risk of a currency crisis remains high given pressures on Egypt’s balance of payments.”
Changing interest rates are hugely important to an economy because of the influence a hike/decrease/hold can have on either stimulating the economy or causing increased inflationary pressure. As one economist succinctly put it to me yesterday:
“Raising the interest rate would not make sense in this environment as it would hamper efforts to revive the economy. On the other hand, lowering the interest rate could push up inflationary pressures and further increase depreciation pressures on the Egyptian pound. Hence, the best course is to be neutral before taking a bold action.”
So in November 2011, when Egypt’s central bank raised the interest rate for the first time since 2008, it was in an effort to shore up the faltering Egyptian pound and inject much-needed liquidity into the country.
The question is – at what point will Egypt’s economy be able to withstand a vitally important interest rate hike to bolster the economy without falling flat on its feet?
(Read Capital Economics latest research: Capital Economics: Egypt’s CBE keeps rates on hold)