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Egypt: CPI accelerates in March

Daniel Richards - MENA Economist
Published Date: 11 April 2022


Egypt’s CPI inflation accelerated to 10.5% y/y in March, compared with 8.8% in February, meaning that more aggressive action by the Central Bank of Egypt (CBE) is likely at its next MPC meeting, scheduled for May 24. The bank’s target range for CPI is 5%-9%.

The Egyptian economy has come under pressure in recent months, first by the prospect of imminent tightening by the US Federal Reserve, which has implications for the attractiveness of emerging markets to international investors, and then from the war in Ukraine which has accelerated a preexisting upwards trend in inflation as global wheat prices have soared. The March inflation print was the fastest pace of price growth since mid-2019. Food & beverage prices were a key driver of the headline figure as they rose 4.5% y/y, with cereal and bread prices rising 11%, despite government efforts to cushion the blow on bread prices through uniform price-setting for free market sellers.

Egypt real interest rates back to negative

Source: Bloomberg, Emirates NBD Research

Amid this challenging external environment, the central bank made its first hike of this cycle when it raised by 100bps at an unscheduled meeting on March 21, which took the overnight deposit rate to 9.25%. On the same day, the pound depreciated by around 16% (see Egypt: CBE moves early ) after a prolonged period of stability. Both of these developments may have been prerequisites for a new funded programme with the IMF, and indeed the Fund has stated that it is in discussions with Egypt for ‘a comprehensive programme that might include financial support.’

With a deal still not inked, we expect that the central bank will look to maintain the proactive hiking that it began in March. Real interest rates have now fallen back into negative territory, and we now anticipate that the CBE will hike by 150bps at the next meeting in May as it looks to get ahead of price growth. While inflation will likely peak in the next month or two as some of the base effects pass through, the price pressures are increasingly broad based, and core inflation has also accelerated, hitting 10.1% y/y in March, up from 7.2% in February. The depreciation of the pound will keep price pressures salient, and while global wheat and oil benchmark prices have fallen back from recent peaks, they remain highly elevated compared to a year ago. As such, we expect that the bank will look to maintain its differential with a further 100bps hike in June.