Egypt: Rate hikes on cards as inflation rises fastest since 2018

By Jaysim Hanspal
Posted on Thursday, 8 September 2022 16:32, updated on Tuesday, 27 September 2022 11:11

A worker carries chicken eggs at Fresh Eggs Farm as egg prices have risen in the market due to higher feed prices after Russia’s invasion of Ukraine, in El-Menoufia governorate, north of Cairo, Egypt, September 6, 2022. REUTERS/Mohamed Abd El Ghany

Egypt will likely resume its tightening monetary policy soon after inflation in urban areas rose to its quickest level since November 2018, driven by soaring food prices.

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

Food and beverage costs soared to 23.1% amid a weakening pound as well as import restrictions, which have resulted in a widening gap between supply and demand over the past months. The North African country imports many of its raw materials and foodstuffs.

“We expect that inflation will peak at around 17% y/y in Q4.

A MENA economist from Capital Economics says the London-based investment bank does not expect Egypt’s inflation to be tamed in the coming months. “Looking ahead, we think that headline inflation will accelerate over the rest of the year,” James Swanston tells The Africa Report. “We expect that inflation will peak at around 17% y/y in Q4.”

Growing rates of food and fuel due to the current war in Ukraine has created an increasingly-unstable environment for governments. Egypt has hiked fuel prices three times so far this year, but backtracked on an earlier decision to gradually remove bread subsidies, from which more than two-thirds of Egypt’s 100-million-plus population benefit.

Further depreciation

Shortly after the Ukraine war broke out in February and its trickle-down economic repercussions started to unfold, Egypt devalued the local currency by over 15% in March. Since then, the pound has been slightly – yet constantly – falling, reaching around 19.30 against the US dollar thus far.

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

“The CBE [Central Bank of Egypt] left interest rates on hold” in the last two meetings of its Monetary Policy Committee (MPC), “allowing the pound to gradually weaken,” Swanston says. “It has fallen a further 6% against the dollar since March’s devaluation [and] has eased some of the pressure on officials to act to shore up the balance of payments position,” he adds.

More rate hikes 

A rampant inflation, fuelled by the pound depreciation and the war’s repercussions, will likely urge the CBE to restart its monetary tightening, according to Swanston.

“With inflation set to rise further and the pound likely to fall faster, we think that policymakers will opt to resume the tightening cycle soon,” he says. “We have penciled in a total of 150bp of hikes, taking the overnight deposit rate to 12.75% by the end of this year.”

Egypt has witnessed cumulative 300 bps rate hikes since March, all under former CBE governor Tarek Amer, who resigned last month and was succeeded by Hassan Abdalla. 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 22 September. It will be the second under Abdalla’s command.

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