Bloomberg: Egypt’s Record Food Price Surge Puts More Big Rate Hikes in Play


On February 9, Bloomberg published this detailed report on inflation and rising food prices in Egypt: Egypt’s monthly food prices soared at the fastest pace, sending inflation in urban parts of the country sharply higher in January and adding to the urgency for the central bank to resume interest-rate hikes. The surge in cost increases was a surprise to many economists even after last month’s steep currency devaluation heaped more pressures on consumers in the Middle East’s most populous nation. Food and beverage prices, the single most significant component of the inflation basket, jumped an annual 48% in January, the state-run statistics agency CAPMAS said Thursday. The headline consumer-price index climbed 25.8% year-on-year, up from 21.3% the previous month. But even excluding volatile items such as food and energy, annual core inflation topped 31% to reach the quickest since late 2017.

The figures may encourage the central bank to resume a cycle of monetary tightening after a surprise decision last week to leave rates on hold. Egypt’s government has said that tackling soaring prices for food and other commodities is its top priority for the country, where a large proportion lives around or below the poverty line. Economists at EFG Hermes and Naeem Holding now expect official borrowing costs to rise by around 200 basis points or more in the months ahead. At the same time, Goldman Sachs Group Inc. said it couldn’t rule out “an unscheduled hike” before the next policy meeting on March 30.

Behind the broad acceleration in January was the steepest sequential monthly rise in food prices since the current data series began almost 20 years ago, surpassing their peak after Egypt’s devaluation in 2016 with an increase of just over 10%, according to Farouk Soussa, an economist at Goldman. “Rising food prices will be a significant concern for the Egyptian authorities,” Soussa said in a note. “Containing inflation expectations and, in particular, improving domestic FX liquidity to ease chronic pressure on the Egyptian pound will require the Egyptian central bank to pursue tighter monetary policy in the coming months.” In a statement accompanying its last policy decision, the central bank said it was assessing the impact of a combined 800 basis points of rate increases in 2022 on the economy. It’s targeting inflation at an average of 7%, plus or minus two percentage points, by the fourth quarter of 2024. The price surge came as the pound plunged roughly 18% last month alone. Although it’s been more stable in recent weeks, the Egyptian currency slipped as much as 0.6% on Thursday to reach an almost one-month low of 30.54 against the dollar.

The depreciation is a sign that Egypt was gradually shifting to a more flexible exchange rate, a move that helped authorities secure a $3 billion International Monetary Fund deal for an economy battered by higher food and fuel import bills stemming from Russia’s invasion of Ukraine. Faster inflation has also meant yields on Egyptian Treasury bills and bonds have turned negative when adjusted to inflation. That’s limited the appeal among overseas investors for local securities when Egypt is seeking an influx of foreign currency. The average yield at the government’s sale of 12-month Treasury bills on Thursday reached a record high of 22.126%.

The costlier debt burden is a concern for a government that spends nearly half its revenue on interest payments. Moody’s Investors Service this week downgraded Egypt’s credit rating deeper into junk territory, warning it would take time to “tangibly reduce” its vulnerability to external risks such as higher borrowing costs and inflationary pressures. Prices are likely to accelerate further in the short term, spurred by an expected hike in fuel and increased demand during the holy month of Ramadan, which begins at the end of March and is marked by family gatherings and large meals. Naeem expects inflation to cross 27% by March.