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Daniel Richards - MENA Economist
Published Date: 09 June 2022
Egypt’s headline CPI inflation rate rose to 13.5% in May, up from 13.1% the previous month. This was the fastest pace of annual price growth since May 2019 and marked the sixth straight month of accelerating inflation, although on a m/m basis headline inflation slowed to 1.1% in May from 3.3% in April.
Egypt is particularly exposed to some of the global inflationary trends prevailing at present, with around 80% of its wheat imports sourced from the Black Sea region. With bread a staple at meals, this has contributed to food and beverage prices growing 24.8% y/y in May – down modestly from 26.0% in April but given that it accounts for around two-fifths of the CPI basket, this has been a key contributor to the headline figure.
Source: Bloomberg, Emirates NBD Research
Government efforts to limit the pass-through of the global surge in wheat prices through introducing price caps and sourcing from new markets such as India should help limit any further growth in food prices, and global wheat prices have eased a little in recent weeks. Already the m/m rise in food prices in Egypt has slowed sharply to 0.6% last month from 7.6% in April. Nevertheless, the yearly inflation rate will remain high for the time being, with global food and other commodity prices remaining elevated and the Egyptian pound weaker than a year-ago.
Egypt’s real interest rates are in negative territory with inflation at current levels. The CBE hiked its benchmark overnight deposit rate by 200bps to 11.25% last month, taking the total to 300bps with the intermeeting hike made several days prior to the scheduled date of the March meeting. The MPC is next due to meet on June 23, and we have pencilled in a further 150bps rate hike, with a fair chance that the bank errs on the higher side given the ongoing inflationary pressures eroding yields and the pressure on the pound potentially prolonging this. Many of the inflationary pressures are exogenous and far from the control of the CBE, and the bank has said that it will tolerate higher-than-targeted inflation as it relates to first-round effects. However, it also has also acknowledged in previous communiqués that monetary policy tools are used to contain ‘second-round effects emanating from supply shocks that may lead to deviations from inflation targets.’ An argument against more aggressive hikes by the CBE is the potential impact on government debt servicing costs, with 35.3% of government expenditure going towards servicing debt over the first 10 months of the present fiscal year (ending June).
Egypt’s net FX reserves declined USD 1.6bn to USD 35.5bn in May as the central bank made payments on Eurobonds and to the IMF, providing a healthy five months’ worth of import cover.
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