PHOTO
With urban inflation reaching a new record high of nearly 36%, Egypt’s policymakers are expected to carry on with fiscal tightening policies amid expectations of a new stint of currency devaluation, Capital Economics said on Monday.
Annual urban consumer price inflation has risen to a record 35.7% year-on-year in June from 32.7% in May, Egypt’s Central Agency for Public Mobilization and Statistics said in a statement issued on Monday. The annual nationwide inflation rate has jumped to 36.8% from 14.5% in the same month last year, according to the same statement. The jump was primarily driven by food and beverages, whose prices had increased by 64.9% year-on-year.
“We expect that the Central Bank of Egypt will resume its tightening cycle in the comping months and hike interest rates by a further 200bp, taking the overnight deposit rate to 20.25 percent,” Capital Economics said in a note issued Monday. Earlier forecasts by the London-based think tank had penciled in the hike in September. However, recent inflation figures might force monetary policymakers to raise interest rates sooner, the note said expecting the CBE to adopt the hikes as early as August.
Last month, the CBE decided to leave overnight interest rates for deposit unchanged at 18.25% and at 19.25% for lending, citing a slowdown in economic growth rates which had fallen to 3.9% in Q4 2022 from 4.4% in Q3 2022.
“Looking ahead, inflation is likely to bump around its current rate over the remainder of the year. But there are two key upside risks,” Capital Economics said. The anticipated extreme weather events - a phenomenon commonly known as El Nino- could affect agriculture in the coming few months and lead to higher food inflation. In addition, new inflationary waves might also kick in as soon as policy makers embark on a fresh devaluation of the local currency, the consultancy said.
“The pound is currently trading at a discount of 20% on the parallel market and we think the authorities will ultimately devalue the pound to 35/$ by year-end. There’s a risk that it overshoots,” it added.
Since March 2022, the Egyptian Pound has been devalued by nearly 50% as a result of the global economic shock caused by the Russian invasion of Ukraine. In December, the IMF approved a $3 billion Extended Fund Facility loan for the cash-strapped country to be disbursed over 46 months. The adoption of a flexible exchange rate was among the loan conditions.
(Writing by Noha El-Hennawy; editing by Brinda Darasha)
