Rising inflation and interest rates

Safeya Mounir , Tuesday 14 Mar 2023

Rising inflation rates are likely to prompt the Central Bank of Egypt to hike interest rates, reports Safeya Mounir


Egypt’s annual headline inflation rose in February to 31.9 per cent, recording its highest rate in five years and continuing an ascending trajectory for six consecutive months, reported the Central Agency for Public Mobilisation and Statistics (CAPMAS) this week.

Monthly inflation jumped to 6.5 per cent, up from 4.7 per cent and compared to 1.6 per cent this time last year.

Core inflation, as computed by the Central Bank of Egypt (CBE), rose to 40.3 per cent in February, the highest rate it has seen since calculations started in 2009. Core inflation on a monthly basis recorded 8.1 per cent, up from 6.3 per cent in January.

Core inflation does not take into account fluctuations in volatile items such as fruit and vegetables.

Mohamed Abu Basha, head of macroeconomic research at investment bank EFG-Hermes, said the main reason for the surging inflation was the appreciation of the price of the US dollar against the Egyptian pound. Another reason, he added, was speculation, manifested in the surge in the prices of poultry and dairy products as well as in animal feed prices.

Given these factors, it will be difficult to predict when inflation will start to recede, Abu Basha noted.

Prices of commodities and services have risen in Egypt due to the appreciation of the value of the dollar and subsequent dollar shortages, on which the country largely depends to import its basic needs.

After the CBE floated the pound, the dollar registered LE32 in January up from LE27.65 per dollar at the end of 2022, before appreciating slightly to around LE30. This week the dollar was trading at close to LE31.

Aya Zoheir, head of research at Zilla Capital, said it had been expected that core inflation would rise to this level due to hikes in inflation in the US market. This meant that inflation in Egypt will likely rise again and the national currency will further depreciate, she said. The shortage in commodities will also lead to the increase in prices.

The Russia-Ukraine war has resulted in hikes in the prices of basic goods the world over, and the repercussions of the conflict will continue to affect Egypt at least until the end of the current fiscal year, Zoheir said.

Food and beverage inflation has reached 61.5 per cent on an annual basis on the back of an increase in the price of cereals and bread by around 77 per cent, a 95 per cent increase in the prices of poultry and meat, and a rise in the price of dairy products and eggs by around 75 per cent.

Moreover, fruit prices have surged by 26.2 per cent, vegetables by 17.5 per cent, sugar by 21.4 per cent, and coffee, tea, and cacao by 60.2 per cent.

Abu Basha foresees a rise in interest rates by two per cent as part of the CBE’s measures to contain inflation.

Zoheir concurred, adding that this two per cent increase might be implemented in stages or in one go. The CBE’s decision will depend on the US Federal Reserve’s call on 21 March, she said, adding that if the latter increases interest rates by one per cent, the CBE will probably make an equivalent move.

Domestic markets are holding their breath in anticipation of the results of the meeting of the CBE’s Monetary Policy Committee, slated for the end of March, when it will set the new interest rates.

The US investment bank Goldman Sachs anticipates that the CBE will raise interest rates by 300 basis points this month.

In its latest meeting on 2 February, the CBE maintained interest rates at 16.25 per cent for deposits and 17.25 per cent for lending. Over the past year, the CBE has devalued the pound against the dollar three times, resulting in the national currency losing about 50 per cent of its value against the greenback.

* A version of this article appears in print in the 16 March, 2023 edition of Al-Ahram Weekly


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