Egypt inflation reverses downward trend

Theodore May
4 Min Read

CAIRO: After a period of significant decline, Egypt’s September inflation rose for the first time in 10 months, largely on the back of higher food prices.

Urban headline inflation hit a low of 9 percent in August, but state statistics agency CAPMAS has released data this week saying that inflation bounced to 10.7 percent for September.

Food prices for the month rose by 17.4 percent year on year, leading the way to higher headline inflation. Food inflation was 3.7 percent on a monthly basis.

Recreation and culture related prices inflated by 6.3 percent.

“Detailed data on the breakdown of food items’ prices showed a higher rise in the prices of grains, dairy products, vegetables, meat and fish and sugar products, wrote economist Reham ElDesoki of Beltone Financial.

“Problems between farmers and milk producers since the beginning of the year had been helping fuel food inflation, as did the recent rise in international sugar prices, she added.

An increase in food consumption during Ramadan, according to Beltone, was largely responsible for the increase in prices.

Since the onset of the global financial crisis, the Central Bank of Egypt (CBE), like many central banks around the world, has embarked on an ambitious campaign to slash interest rates in order to loosen the credit market and spur business.

In mid September of this year, the Monetary Policy Committee (MPC) announced that it had cut two key rates by 0.25 percent, taking the overnight deposit rate to 8.25 percent and the overnight lending rate to 9.75 percent.

The CBE has cut rates every month since February, but it has always coupled its announcements of rate cuts with a stated awareness that such cuts could reintroduce inflationary pressures to the economy.

“Nonetheless, while underlying inflation is expected to remain within the CBE s comfort zone in the period ahead, annual headline inflation is likely to inch up over the coming months mainly owing to base effects from last year, wrote Rania Al-Mashat, head of the Monetary Policy Unit, in her September memo about rate cuts.

“This development has already been factored into the CBE s assessment of the monetary policy stance.

So while an increase in inflation was predicted, some analysts have said that it came sooner and bigger than they would have expected.

“The increase in inflation in September, however, exceeded our expectations, confirming a higher resistance, than we had expected, of inflation and implying a higher volatility in food prices, wrote ElDesoki.

Inflation is of special concern in Egypt because it is usually driven by increases in food prices. Since Egypt is a lower income country, food price volatility can spell disaster, as it did last year when even bread became unavailable for many of the country’s poorest.

But the global economic crisis largely shelved concerns about inflation, allowing the CBE to pursue a program of rate cutting.

The latest increase in inflation has led some banks to speculate that rate cuts may be over. The competing need to bolster economic growth, though, may lead the bank to hold rates steady when the MPC meets on Nov. 5.

“Based on information available up to date, we believe the CBE will likely leave rates unchanged, for the first time since February 2009, wrote Pharos Holding in a note.

Share This Article
Leave a comment