Inflation edges higher to ‘put the brakes’ on Egypt’s rate cuts

Egypt’s annual urban inflation accelerated for a second month, complicating the central bank’s path forward after its first interest-rate cut in almost a year.

Paced by food costs, consumer prices in February rose 14.4 per cent from a year earlier after a gain of 12.7 per cent in January, the state statistics agency, CAPMAS, said on Sunday. The monthly increase of 1.7 per cent was the biggest since October.

The figures should “put the brakes on the possibility of further interest-rate cuts by Egypt’s central bank, for now,” Naeem Holding, an investment bank based in Cairo, said in an emailed note.

The price build-up could test the central bank’s resolve following its surprise rate cut of 100 basis points last month that it said was warranted by “the moderation of underlying inflationary pressures.” Policymakers met their inflation target for last year and set a goal of 9 per cent, plus or minus 3 percentage points, for the last quarter of 2020.

The central bank’s next rate meeting is scheduled for March 28. Annual core inflation, the gauge measured by the bank and which strips out volatile and regulated items, came in at 9.2 per cent in February compared to 8.6 per cent the month before.

“The sudden increase in prices was driven by a sharp rise in food prices,” Mohammad Abu Basha, head of macro analysis at EFG Hermes in Cairo said in an emailed note. “We think the reading might dim the chances for another rate cut when the Egyptian central bank meets later this month.”

Customs, subsidies

Besides the run-up in food costs, plans to lift fuel subsidies this year are certain to push up inflation. Price growth is also under pressure from a government decision to set a new customs exchange rate in November, based on the central bank’s official conversion rate. The move was aimed at curbing an outflow of dollars as authorities pushed ahead with a sweeping program to revive the economy.

Inflation is picking up despite a rally by the Egyptian pound, which is now trading at its strongest against the dollar in two years. Purchases of local debt by foreigners are among the key drivers behind the appreciation, even as the government changed the way banks will calculate tax on profits from local Treasury bills and bonds.

“Expect inflation to hover around this level in the coming months due to the seasonal and one-off factor of fuel-price increases” that may be implemented by June, said independent economist Reham Al Desoki.