Egypt’s Real Rates Are World’s Highest After Inflation Letup

CAIRO(Capital Markets in Africa) — Consumer prices in urban parts of Egypt grew at the slowest annual pace since November as the global pandemic weighed on demand and food costs declined.

Defying some analyst expectations for a moderate pickup, inflation eased to 4.2% from a year earlier in July, compared with 5.6% in June, according to data published on Monday by the state-run statistics agency, CAPMAS. The deceleration left the country with the world’s highest interest rates when adjusted for inflation.

Food and beverage prices, which comprise the largest single component in the consumer goods basket, fell 1.5% in July. Monthly inflation sped up to 0.4% from 0.1% the previous month.
Read more: Virus Toll on Jobs, Incomes Laid Bare in Egypt Before Reopening

“Purchasing power continues to show signs of weakness, which started in 2019 and got worse with the repercussions of the pandemic on wages and employment,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. “A continued focus from the government on a sustainable supply of fruits and vegetables to the market has kept food inflation in check.”

More than a quarter of employed Egyptians lost their jobs between the end of February and May, and about 90% of Egypt’s households switched to cheaper food to adjust to the new circumstances. The government earlier cut its economic growth projections for the fiscal year that started in July, but the depth of the slowdown depends on when the contagion will subside.

Away From Target
Annual inflation remains below the lower bound of the central bank’s target range for the end of the year, set at 9% plus or minus 3 percentage points. Still, most economists surveyed by Bloomberg predict the central bank will leave its key deposit rate at 9.25% when its Monetary Policy Committee meets on Aug. 13.

Adjusted for prices, Egypt’s policy rate is just over 5%, the highest among more than 50 major economies tracked by Bloomberg. The central bank reduced borrowing costs by a combined 450 basis points last year and another 300 basis points at a March 16 emergency meeting.

But the focus for policymakers will likely be on the uncertain global outlook and the need to keep Egyptian assets appealing for international investors after capital inflows resumed in June.
Even with inflation expected to stay around 5%-6% for the rest of 2020, the central bank probably won’t act any time soon, according to El-Swaify.

“The MPC will likely maintain rates until year-end to keep an attractive real rate at around 3%, especially since foreign investors started showing an appetite for local debt instruments once more,” she said.

Source: Bloomberg Business News