Average annual headline inflation is expected to remain in line with the central bank’s target
Egypt’s central bank kept its benchmark interest rate unchanged Thursday as increases in fuel and electricity prices rekindled concerns over inflation.
The Monetary Policy Committee held the deposit rate at 16.75 per cent and the lending rate at 17.75 per cent. Ten of 11 economists surveyed by Bloomberg had expected no change.
Inflation has dropped from highs above 30 per cent for much of last year to near 11 per cent in May, allowing the central bank to begin cutting borrowing costs that had stifled business growth. That direction could quickly reverse, however, after the government introduced a new round of subsidy cuts this month under a three-year program of economic measures that helped it secure a $12 billion International Monetary Fund loan.
A decision to raise the price of metro tickets by as much as 300 per cent in April triggered scattered protests. The government also raised prices for piped water by more than 45 per cent ahead of the start of the new fiscal year in July.
“Fiscal consolidation measures are expected to lead to one-off increases in the price level, which translate into temporary higher inflation rates,” the central bank said in a statement.
Even so, average annual headline inflation is expected to remain in line with the central bank’s target, and single digit inflation is “expected to be reached after the temporary effect of supply shocks dissipates.”
Core inflation, the gauge the central bank measures because it strips out volatile items, was 11.09 per cent in May — its lowest level in over two years, and squarely within the central bank’s target range of 13 per cent (+/-3 percentage points).
Egypt saw a sharp spike in prices after it floated the pound in November 2016 as part of a package of reforms presented to the IMF. The currency quickly halved in value against the dollar and, coupled with repeated increases in import duties and reductions in energy subsidies, pushed up inflation.
“Unsurprisingly, the central bank decided to keep rates unchanged. It’ll want to assess the inflationary impact of the recent increase in fuel and electricity prices before easing policy further,” said Ziad Daoud, chief Middle East Economist at Bloomberg Economics in Dubai.
The IMF’s decision to postpone the date for approving the next tranche of its Egypt loan to a day after the rate decision signalled “its continued hawkish oversight, favouring monetary austerity until inflation and money supply growth are tamed,” Cairo-based brokerage Naeem said in a note.