The Central Bank of Egypt (CBE) expects annual headline inflation rates to hover around the midpoint of the target inflation rate of 7% (±2%) during the fourth quarter (Q4) of 2022.
The CBE explained in its monetary policy report, issued last week, that the annual headline inflation rate may be mathematically affected by the negative impact of the base year. This is related to the interest of monthly headline inflation rates to their normal levels during 2021.
“In general, the upward risks to the expectations of the baseline inflation scenario are represented in global commodity prices, which may move more than the expected local inflation,” the CBE said, “On the other hand, risks that may lead to a downward trend are represented in recording food commodity inflation rates less than expected during the years 2021 and 2022.”
It added, “This may lead to a greater than expected restriction of future monetary conditions, taking into account the period of achieving the target inflation rate.”
The CBE’s Monetary Policy Committee (MPC) decided to keep the basic interest rates unchanged at its meetings held on 4 February, 18 March, 29 April, and 17 June 2021.
This came after the committee reduced the interest by 400 basis points during 2020. It aimed to support economic activity in light of global and local developments, and the outbreak of the novel coronavirus (COVID-19) pandemic.
According to the CBE, the MPC’s decisions are appropriate at the present time, and are consistent with achieving the target inflation rate of 7% (±2) on average during Q4 of 2022.
The monetary policy report said that at the global level, economic activity continued to recover, albeit unevenly at the level of different sectors and countries. This was driven by the inability of some countries to contain the spread of the coronavirus pandemic.
The recovery of the global economic activity depends on the developments in the spread of the pandemic, in addition to the effectiveness, abundance and speed of distributing the vaccines of the pandemic.
The appropriate financial conditions that support global economic activity in the medium term are also expected to continue.
The CBE expects that the growth rate of Egypt’s GDP would gradually recover over the medium term. This would run in parallel with the expected decrease in the degree of uncertainty related to the pandemic and its impact on economic activity.
It also expects the government’s structural reforms and economic reform measures to contribute to the expected recovery of economic activity once the pandemic is contained.
The CBE indicated that global prices of basic food commodities continued to rise, driven by supply and demand. In addition, expectations for Brent crude prices, which are included in the future outlook for domestic inflation, increased compared to the monetary policy report issued earlier.
It added that international prices of Brent crude still pose risks to inflation estimates. This comes as they continue to be affected by Organization of Petroleum Exporting Countries (OPEC) alliance decisions with some non-OPEC exporting countries and the rise in global demand.
On the local level, the CBE said that the prices of some petroleum products have reached the levels of cost coverage. Accordingly, international petroleum prices are reflected on domestic inflation, through the decisions of the Automatic Pricing Committee for Petroleum Products.
This is related to the application of the automatic pricing mechanism in the prices of petroleum products according to the developments of costs on a quarterly basis and a maximum ±10%.
The MPC had decided to raise the domestic prices of some petroleum products in its periodic review in April 2021 by 25 piasters per litre, in conjunction with the rise in international oil prices.
The CBE also revealed at the end of last week that the annual headline inflation rate in urban areas rose to 4.9% in June 2021 from 4.8% in May 2021. This was driven by the negative impact of the base period.
Headline inflation recorded a monthly rate of 0.2% in June 2021, compared to 0.1% in June 2020, which was affected by the precautionary measures related to the COVID-19 pandemic.
The CBE said that the average general urban inflation rate recorded 4.5% during fiscal year (FY) 2020/21, the lowest level recorded since FY 2005/06. This compares to an average of 5.7% during FY 2019/20.
The monthly urban headline inflation rate for June 2021 mainly reflected the increase in the prices of subsidised food and non-food commodities.
The CBE attributed the rise in the prices of subsidised food commodities to the rise in the prices of subsidised vegetable supply oils.
The rise in the prices of non-food commodities reflected an increase in the prices of a large number of goods and services. Meanwhile, the prices of other food commodities decreased, driven by a decrease in the prices of poultry, vegetables, and fresh fruits.
Accordingly, the slight rise in the annual headline inflation rate in June 2021 was driven by the increase in the annual rate of food inflation, which was partially limited by the decrease in the annual rate of non-food inflation.
The annual rate of food commodity inflation rose to 3.4% in June 2021 from 1.7% in May 2021. This is in light of the annual inflation of food commodities fluctuating between negative and positive since September 2019.
On the other hand, the annual rate of inflation of non-food commodities decreased to 5.6% in June 2021 from 6.3% in May 2021, which is the lowest level recorded since June 2014.
According to the CBE, the decline in the prices of basic food commodities in June 2021 came to a lesser degree than the decline in June 2020.
It pointed out that core inflation recorded a monthly rate of 0.1% in June 2021, compared to a negative rate of 0.3% in June 2020. As a result, the annual rate of core inflation rose to 3.8% in June 2021 from 3.4% in May 2021.
It pointed out that the annual headline inflation rate for the total of the country rose to 5.3% in June 2021, compared to 4.9% in May 2021. The annual headline inflation rate in the countryside rose to 5.7% in June 2021, compared to 4.9% in May 2021.
The prices of administratively determined goods and services rose at a rate of 1.3, to contribute by 0.31% points to the monthly rate of headline inflation. This was due to the increase in the prices of subsidised vegetable oils, according to the Ministry of Supply and Internal Trade’s announcement.
On the other hand, the prices of fresh vegetables decreased by 4.3% after rising for three consecutive months, and the prices of fresh fruits decreased by a rate of 3.2%.
Consequently, the prices of fresh vegetables and fruits together contributed a negative 0.21% to the monthly headline inflation rate.
Poultry prices fell for the second consecutive month by 2.7%, to contribute a negative 0.11 percentage point to the monthly headline inflation rate.
According to the CBE, red meat prices rose for the sixth month in a row at a rate of 0.5%, to contribute by 0.02% to the monthly general rate of inflation. Meanwhile, egg prices rose at a rate of 4.2%, to contribute by 0.04% to the monthly headline inflation rate.
The prices of other basic food commodities, including dairy and bakery products, also rose, contributing together by 0.03% to the monthly headline inflation.
The prices of services increased at a rate of 0.3% to contribute by 0.09% of a percentage point to the monthly rate of headline inflation, mainly due to the increase in the costs of trips, resorts, outpatient services and barbershops.
The prices of consumer goods increased by 0.1%. This pushed the monthly headline inflation up by 0.01%. This was mainly driven by the increase in the prices of household hygiene products and medical products.
This increase was limited by a decrease in the prices of clothing, in contrast to its seasonal pattern.
According to the CBE, the increase in the core consumer price index is due to the increase in the prices of basic commodities. Meanwhile, the prices of services and consumer goods contributed 0.13 and 0.02%, respectively, to the monthly core inflation rate.
It pointed out that this partially limited the contribution of basic food commodities by a negative 0.04% to the monthly rate of core inflation.