Egypt will probably refrain from further monetary tightening as a slight cooling in inflation staves off the need to raise interest rates until a much-awaited depreciation in the pound.
(Bloomberg) — Egypt will probably refrain from further monetary tightening as a slight cooling in inflation staves off the need to raise interest rates until a much-awaited depreciation in the pound.
The central bank has raised rates by 900 basis points in the past year. Still, Governor Hassan Abdalla has signaled it’s doing little to contain inflation, which he says is stoked mainly by supply bottlenecks.
Most economists surveyed by Bloomberg — eight out of 11 — expect the Monetary Policy Committee to keep its deposit rate at 18.25% on Thursday, while the rest forecast an increase of 100 basis points.
The inflation rate soared from under 6% in 2021 to almost 33% in March this year, partly because Russia’s invasion of Ukraine led to a spike in wheat and food prices. It dipped for the first time in 10 months in April, to 30.6%.
The central bank will “hold fire until there is movement on the currency,” said Simon Williams, chief economist at HSBC Holdings Plc for Central & Eastern Europe, the Middle East and Africa. It’s “an opportunity that policymakers will likely take given the stiff headwinds already facing the corporate sector and the fiscal costs of higher interest rates.”
Egypt, a major wheat importer, was particularly vulnerable when Russia’s attack roiled commodity markets. The Middle East’s most populous country has devalued the pound three times since March 2022 and secured a $3 billion International Monetary Fund deal.
Read: How to Know Where Egypt’s Once-in-Decade Crisis Is Heading
The country is still grappling with severe foreign-exchange shortages and traders are pricing in more weakening of the pound.
Read: IMF Awaits More Egyptian Reforms Before First Review
Some of the government’s recent measures may add to inflationary pressure. It raised subsidized prices for some goods, including rice and sugar, and increased diesel by 14% this month.
The central bank “might wait to see their filtering through into the economy over the coming couple of months before taking action” on rates, said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes.
The diesel hike will have a “significant impact” on inflation, according to Farouk Soussa, an economist at Goldman Sachs Group Inc. He expects price rises to accelerate to almost 37% in the third quarter.
Bond investors are demanding higher returns on Egypt’s local debt as pressure on the pound builds. Yields on 12-month Treasury bills are at a record high of more than 23%.
Read: Egypt’s Central Banker Explains Policy in Rare Public Appearance
The IMF has said authorities should “use the monetary policy instruments” at their disposal — especially interest rates — to tackle inflation. There could be a “high social cost” if it stays high, the fund said last month.
–With assistance from Netty Ismail and Harumi Ichikura.
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