Egypt’s annual inflation rate increased to its highest level in 20 months last month, reporting 6.6 per cent compared to 5.5 per cent in August.
The hike was fed by an increase in the food and beverages included in the basket of commodities and services used to calculate changes in prices. Food and beverages inflation recorded a 10.6 increase, the highest annual increase in 27 months. This alone contributed about 3.5 per cent to the total annual increase of 6.6 per cent. Vegetables and meat recorded the highest annual increases of 32.5 and 11.3 per cent, respectively.
Despite the hike in inflation, there is no cause for concern, wrote Al-Ahly Pharos analyst Israa Ahmed in a research note this week. The increases in the prices of food items are mainly due to temporary factors pertaining to agricultural shocks that have impacted the prices of some vegetables, she explained. Investment bank Beltone expects the upward trend to continue in the fourth quarter of 2021 “as the rise in global commodity prices starts to reflect gradually in the domestic market,” it said.
World food prices rose for a second consecutive month in September to reach a 10-year peak, according to the UN Food and Agriculture Organisation (FAO). Runaway oil prices and the skyrocketing cost of raw materials are raising worries about global inflation. These have been accompanied by the fact that local inflation in comparable months last year was low, meaning that the comparison will be translated into higher readings for the current year.
While inflation worries are expected to see the world’s central banks moving to increase interest rates, the Central Bank of Egypt (CBE) is not expected to take this step for the time being. “We expect the CBE to maintain interest rates at the upcoming Monetary Policy Committee (MPC) meeting on 28 October,” noted Beltone. “The need to maintain lucrative carry trade opportunities in the fixed income market, particularly with the rise in global rates that are posing a risk to inflows into emerging markets, backs our view.”
Egypt offers one of the highest yields on its treasury bills and bonds among emerging markets, a fact that secures it more than $20 billion of foreign investments in these instruments. Any decline in interest rates would undermine their appeal. Another factor that increases the possibility of the CBE keeping the rates as they are is the fact that inflation is well within the CBE’s target of five to nine per cent.
Ahmed said that a number of factors should be weighed in any decision related to monetary policy in the coming period, including concerns about global inflation, US Federal Reserve plans to increase interest rates, fears of an ongoing energy crisis, and the impact of shutdowns in China.
*A version of this article appears in print in the 14 October, 2021 edition of Al-Ahram Weekly