“Bloomberg” agency said that it is likely that the Sisi government will refrain from further tightening monetary policy, as the slight slowdown in inflation precludes the need to raise interest rates until the long-awaited devaluation of the pound.
The agency added that the central bank raised interest rates by 900 basis points last year. However, Governor Hassan Abdullah has indicated that he is not doing much to contain inflation, which he says is mainly driven by supply bottlenecks.
She explained that most economists surveyed by Bloomberg – eight out of 11 – expect the Monetary Policy Committee to keep the deposit rate at 18.25% on Thursday, while the rest expect an increase of 100 basis points.
Inflation rose from less than 6% in 2021 to nearly 33% in March this year, in part because Russia’s invasion of Ukraine drove up wheat and food prices. It fell for the first time in 10 months in April, to 30.6%.
Simon Williams, chief economist at HSBC Holdings Plc for Central and Eastern Europe, the Middle East and Africa, said the central bank would “hold its fire until there is movement in the currency”, saying it was “an opportunity that policymakers are likely to seize given the severe headwinds already facing the corporate sector”. and the financial costs of higher interest rates.”
Sisi’s government, a major importer of wheat, was particularly vulnerable when the Russian offensive roiled commodity markets. The most populous country in the Middle East has devalued the pound three times since March 2022 and secured a $3 billion deal from the International Monetary Fund.
The country is still grappling with an acute shortage of foreign exchange and traders are pricing in further weakness in the pound.
Some of the measures recently taken by the Sisi government may increase inflationary pressures. It raised subsidized prices for some commodities, including rice and sugar, and increased diesel by 14% this month.
Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes, said the central bank “may wait until it sees its penetration of the economy over the next two months before taking action” on interest rates.
The diesel hike will have a “significant impact” on inflation, according to Farouk Soussa, an economist at Goldman Sachs Group. He expects the pace of price increases to accelerate to nearly 37% in the third quarter.
Bond investors are demanding higher returns on Egypt’s domestic debt as pressure mounts on the pound. Yields on 12-month Treasury notes are at a record high of over 23%.
The International Monetary Fund said the authorities should “use the monetary policy tools” at their disposal – particularly interest rates – to tackle inflation. And there could be a “high social cost” if it remains high, the fund said last month.
https://www.bloomberg.com/news/articles/2023-05-18/egypt-to-hold-rates-even-with-pound-under-pressure-day-guide
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