Egypt will likely raise interest rates as soon as inflation spikes

Consumer prices jumped 14.6% in August from the same month last year, compared to 13.6% in July, according to Egypt’s statistics agency, CAPMAS.

Food and beverage costs soared 23.1% amid a weaker pound and import restrictions, which led to a widening of the gap between supply and demand in recent months. The North African country imports a large part of its raw materials and foodstuffs.

“We expect inflation to peak at around 17% y/y in the fourth quarter.

A MENA region economist from Capital Economics said the London-based investment bank does not expect Egyptian inflation to be brought under control in the coming months. “Looking ahead, we expect headline inflation to pick up over the rest of the year,” Swanston said. The Africa Report. “We expect inflation to peak at around 17% y/y in the fourth quarter.”

Rising food and fuel levels due to the current war in Ukraine have created an increasingly unstable environment for governments. Egypt has hiked fuel prices three times so far this year, but reversed an earlier decision to phase out bread subsidies, which benefit more than two-thirds of Egypt’s more than 100 million people.

Additional damping

Shortly after the war in Ukraine broke out in February and its economic repercussions began to be felt, Egypt devalued the local currency by more than 15% in March. Since then, the pound has fallen slightly – but steadily – lower, so far reaching around 19.30 against the US dollar.

The pound is fixed for a steeper slide in the near future, a step the government hopes will boost the struggling economy and bring back portfolio investors, who have largely left Egypt as war-induced rising inflation eroded its once-tempting real interest rate .

« The ECB [Central Bank of Egypt] left interest rates unchanged” in the last two meetings of its monetary policy committee (MPC), “allowing the pound to gradually weaken,” Swanston said. “It has fallen another 6% against the dollar since the March devaluation [and] eased some of the pressure on officials to act to shore up the balance of payments position,” he adds.

More rate hikes

Creeping inflation, fueled by the depreciation of the pound and the repercussions of the war, will probably prompt the CBE to resume its monetary tightening, according to Swanston.

“With inflation set to rise further and the pound likely to fall more rapidly, we believe policymakers will choose to resume the tightening cycle soon,” he said. “We have forecast a total of 150 bps of hikes, taking the overnight deposit rate to 12.75% by the end of this year.”

Egypt has seen cumulative rate hikes of 300 basis points since March, all under former CBE Governor Tarek Amer, who resigned last month and was replaced by Hassan Abdullah. Currently, overnight deposit and lending rates stand at 11.25% and 12.25% respectively.

The next meeting of the MPC, whose urban inflation target is 7% plus or minus two percentage points, is scheduled for September 22. It will be the second under Abdullah’s command.

Leslie M. Gill