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Sun 10 Aug 2008 01:28 PM

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Inflation in Egypt hits highest level since '92

Rising food prices drive urban inflation to 22% in July, analysts expect it to remain high.

Rising food prices drove Egypt's urban inflation to 22 percent in the year to July, the highest since January 1992, and analysts expect prices to remain high until the end of the year.

Urban inflation stood at 20.2 percent in the year to June, the state-run statistics agency CAPMAS said on Sunday. Monthly inflation rose 2.2 percent, compared to 0.6 percent in June.

The Egyptian central bank raised its key overnight interest rates for the fifth time this year on Thursday by 50 basis points to tame inflation, bringing the rates to 11 percent for deposit and 13 percent for lending.

"Recent policy rate increases... have had only limited effectiveness due to [the] abundant liquidity in the banking system and low loan-to-deposit ratios," investment bank EFG-Hermes said in a note.

It said the central bank was likely to allow the Egyptian pound to appreciate against the US dollar "as a more effective means of addressing inflation". The pound has gained more than 7 percent against the US dollar since the start of 2007.

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 a low per capita income and high poverty rate 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.

Price rises in urban food and beverages, which slowed down in the month to June at a rate of 0.8 percent, accelerated again in July to a rate of 3.1 percent.

Reham El-Desoki, a senior economist at Beltone Financial, said only a significant long-term decline in the prices of global commodities would help stabilise prices in Egypt.

"This is due to... vendors maintaining their prices at current levels to try to maximise their profits, especially with a market-based pricing system that does not impose price caps on products and services' prices," she added.

Egypt has responded to public anger over inflation by making more cheap food available on a ration card system. Food inflation has hit the poor especially hard because many of them spend more than half their income on food.

Prices for transport in urban areas, which stabilised in June, rose 1.7 percent in the month to July, while urban telecommunication inflation stood at 5.3 percent.

Prices in the country as a whole, an indicator released every two months, rose 23.1 percent in the year to July, from 21.1 percent in the year to May.

In the countryside, inflation rose to 24.3 percent in the year to July, from 22.9 percent two months earlier.

"We expect inflation to be around 18-19 percent by the end of the year, in the absence of additional supply shocks or a spiraling of international commodities prices," El-Desoki said.

A poll by newswire Reuters this month found high inflation is likely to take a toll on real growth in the current 2008/09 fiscal year, with economists predicting gross domestic product growth to slow to between 4.8 and 6.8 percent, below the government's target of more than 7 percent. (Reuters)