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Thursday, 23 September 2021

Inflation takes another dip

Egypt’s annual inflation rate inched down to 5.1 per cent in March compared to 5.3 per cent in February, reports Sherine Abdel-Razek

Sherine Abdel-Razek , Tuesday 14 Apr 2020
photo: Reuters

Egypt’s annual inflation rate, which measures the rate of increase in prices in March this year compared to March 2019, has seen a reduction due to the sharp falls in rises in food and transport costs, which together account for 40 per cent of the basket of commodities according to which the rate is calculated.

Food prices fell by 1.8 per cent last month, compared to a drop of 0.9 per cent in February, while transport inflation eased from 16.1 per cent to 15.4 per cent. “These drops more than offset a jump in tobacco inflation, on the back of a 50 per cent rise in cigarette prices through increases in taxes,” according to Capital Economics, a research group based in London.

Egypt’s headline inflation is now well below the Central Bank of Egypt’s (CBE) target range of nine plus or minus three per cent for the end of 2020. However, analysts were ruling out that the CBE would lower interest rates soon in response to the lower inflation figures.

In its last meeting two weeks ago, the CBE’s Monetary Policy Committee opted to keep interest rates on hold despite the decline in inflation and the slow-down in economic activities due to the coronavirus outbreak. It cut its rates by a surprising three per cent in an emergency meeting at the end of March after the outbreak of the virus.

According to Prime Securities, a local investment bank, it is not expected that the CBE “will deliver a change in its policy rate in the upcoming meeting on 14 May, [while] waiting for the current storm of massive capital outflows to calm.”

Capital Economics seconded this opinion, stating that Egyptian “policymakers seem to have shifted their focus [from interest rates] to supporting the pound, which has been one of the best performing emerging markets currencies in recent weeks due to official intervention in the foreign-exchange market.”

It added that even if the CBE loosened its grip on the pound, there would not be a sharp fall in the currency, and thus inflation should remain low allowing for possible further interest rate cuts in the future.

Egypt’s net international reserves of foreign currencies declined to $40.1 billion in March, or $5.4 billion less than its February reading, marking its first dip in 14 months. According to the CBE, the decline in the reserves is “consistent with the mandate to maintain financial stability”.

However, Prime Securities ruled out the CBE’s intervention to support the pound lasting for long in the light of the impact of the coronavirus on the country’s foreign-currency inflows, for example through tourism.

“A moderate depreciation [of the pound] will alleviate the pressures on the country’s foreign-currency resources amid prolonged uncertainty and shore up foreign investors’ confidence in foreign-exchange flexibility and currency competitiveness,” it said in a research note.

*A version of this article appears in print in the  16 April, 2020 edition of Al-Ahram Weekly

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