While the Central Bank of Egypt unexpectedly raised interest rates on Thursda by 100 basis points (bps) to 19.25%, it still needs to do more in terms of rate hikes and devaluation, said Capital Economics in a note on Friday.

"With growing signs that the FX crunch is hurting economic activity, action will need to arrive sooner rather than later in order to avoid a messy balance of payments crisis," the London-based consultancy said.

The rate hike this week comes after Egypt's inflation hit an annual 35.7% in June. For July, the expansion is expected to reach a record 36.6% year-on-year (YoY).

The central bank has been targeting inflation of 5%-9% by Q4 2023.

Capital Economics said the CBE appeared to be managing the pound by rationing foreign currency but there are signs that this is now starting to disrupt economic activity.

"Soon enough, the CBE will need to act in order to curb the FX liquidity crunch. Policymakers will probably be forced to turn to another devaluation – for our part we think the pound will weaken another 12% to 35/$ by year-end. And crucially it will need to show a credible commitment to a more flexible exchange rate regime."

The devaluation is widely expected to materialise in September.

"We have tweaked our interest rate forecast and expect a 200bp hike, to 21.25%, to come alongside a devaluation at some point in the coming months."

Since March 2022, the Egyptian pound has been devalued by nearly 50% because of the global economic shock caused by the Russian invasion of Ukraine. In December, the IMF approved a $3 billion Extended Fund Facility loan for the cash-strapped country to be disbursed over 46 months.

(Writing by Brinda Darasha; editing by Seban Scaria)