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Wed 10 Sep 2008 05:49 PM

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Egyptian inflation soars to 23.6%

Rising food prices pile more pressure on country's central bank to raise interest rates yet again.

Rising food prices drove inflation in urban parts of Egypt above market forecasts to 23.6 percent in the year to August, piling pressure on the central bank to raise interest rates for the sixth time this year.

The figure, a fresh 16-year-high, compares to 22.0 percent in the year to July, the state-run statistics agency CAPMAS said on Wednesday. Prices in urban areas in the month of August rose 2.4 percent, compared to 2.2 percent in July.

Prices in the country as a whole rose even faster, at 25.6 percent compared with 23.1 percent in the year to July, it said. Economists have focused on the urban index because the countrywide index was previously updated every other month.

Most economists have already been expecting the central bank, which has raised overnight borrowing costs by 225 basis points this year, to hike them again by 50 basis points when its Monetary Policy Committee meets again on Sept. 18.

"It is a very negative surprise that inflation continues to accelerate in Egypt," said Dorothee Gasser-Chateauvieux, a senior economist at ING bank in London. She said she had expected inflation to stabilise at around 22 percent.

"The big problem now is that we are unlikely to see the CPI (consumer price index) below 20 percent before the end of the year, and by June 2009 we should still have a reading of around 13 to 14 percent, which is still very high," she told Reuters.

With the economy growing at its fastest pace in decades, rising inflation has emerged as a tough challenge for the government in a country that has low per capita income and high poverty relative to other Middle East nations.

Soaring food prices triggered violent protests in some areas in the country this year. This prompted the government to raise public sector salaries by 30 percent and then nudge up fuel prices to finance the wage increase.

Simon Kitchen, senior economist at investment bank EFG-Hermes, attributed rising inflation largely to the build-up to the Muslim holy month of Ramadan, during which Egyptians hold massive banquets to break their daily dawn-to-dusk fast.

Official data appear to support this. As for much of the past year, food prices were one of the major driving forces behind the increase in inflation in the year to August.

In urban areas food prices rose 30.9 percent, faster than for any categories other than education at 38 percent and hotels and restaurants at 45 percent.

Kitchen said there was room for the central bank to raise interest rates two more times in 2008. Overnight rates stand at 11 percent for deposits and 13 percent for lending.

Many economists, however, doubt that tight monetary policy alone can help curb inflation because of the abundant liquidity in the banking sector and a low loan-to-deposits ratio.

Gasser-Chateauvieux said raising interest rates to maintain the bank's credibility could backfire.

"I don't think they should hike," she said. "It does not work anyway and it could be tricky for Egypt to continue hiking rates when it still has a very high public debt level."

The central bank also faces a tough balancing act in allowing the Egyptian pound to rise against the euro, a move that could, as Kitchen says, have "anti-inflationary effects in the medium-term" but that may hurt exports to the Eurozone.

The euro has lost 3 percent against the Egyptian pound in the past two weeks. The European Union takes about 40 percent of Egyptian exports and accounts for about 50 percent of tourist arrivals. (Reuters)

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