The Central Bank of Egypt raised interest rates by 1% to address the rising exchange rate and geopolitical tensions. Some might think this move will weaken the dollar and, consequently, the price of gold, but that’s not necessarily what will happen.

An interest rate hike affects the market in more than one way, and not all of its effects show up right away.

Let’s start with the dollar 💸

When interest rates on the pound rise, Egyptian debt instruments become more attractive to foreign investors, especially if the returns are appealing compared with other markets. This could help attract foreign investment and support the pound.

But investors don’t look at interest rates alone; they also consider the possibility that the pound could lose value. In other words, if the return they earn from investing in Egypt is lower than the potential losses from the currency’s depreciation, they may still choose to withdraw their money despite higher interest rates.

That explains why raising interest rates doesn’t guarantee that the dollar will fall. The exchange rate is also affected by import costs, Egypt’s foreign currency needs, investment flows, and external tensions.

What about gold? 💵

Two factors determine the local price: the dollar and the global price of an ounce of gold.

If raising interest rates helps stabilize the pound, that could lower the local cost of gold. And if banks raise the returns on certificates of deposit and savings accounts, some savers may prefer bank returns over gold, especially since gold doesn’t pay periodic interest.

On the other hand, if the dollar rises globally or the price of an ounce of gold increases, gold could remain expensive despite higher interest rates 🪙

So it’s entirely possible for interest rates in Egypt to rise while gold doesn’t fall, because the impact of the exchange rate or the global price could outweigh the impact of interest rates.

Of course, raising interest rates comes at a cost to the economy, because it increases borrowing costs and could put pressure on investment and debt servicing.

So what matters isn’t simply that interest rates have risen, but whether the increase will actually succeed in supporting the pound and containing inflation. The answer to that question will help us understand the likely direction of the dollar and gold in the coming period 👉

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