Egypt Rate Increase No Answer to 30% Inflation

Egypt’s central bank is likely to hold interest rates on Sunday, even with inflation still soaring after the removal of currency controls last year.

Six of seven economists surveyed by Bloomberg expect the central bank to hold the benchmark rate at 14.75% when policy makers meet in Cairo. It last raised rates by 300 basis points on Nov. 3, the day it floated the pound as part of a plan to end a crippling foreign-currency shortage and secure a $12 billion loan from the International Monetary Fund.

Though foreign currency reserves have surged since November, the pound has lost almost half its value against the US dollar and annual inflation has risen above 30%, pressuring households and creating a headache for officials concerned about stability. That led to speculation the central bank would respond by raising rates, a tactic analysts say would be counterproductive because the price gains are not being driven by excess demand.

“This inflationary wave is clearly not demand-driven, it was caused by a sudden increase in costs,” said Omar El-Shenety, managing director at Cairo-based investment bank Multiples Group. That means that higher interest rates “will do little to contain it,” he said.

Consumer prices rose 1.7% in April from a month earlier, the slowest pace since October. Some economists saw it as an indicator that the initial shock from flotation has tapered, though they also predicted the rate will pick up again with cuts to fuel and other subsidies in the fiscal year beginning July.

The government expects inflation to average 23% next fiscal year, and ease to 9.7% the year after.

Jihad Azour, the IMF’s Middle East chief, last month highlighted interest rates as the “right instrument” to tame inflation, though he later listed them as only one option among a set of tools available to the regulator.

Egyptian authorities have also since reached a staff-level agreement with the IMF to unlock the second tranche of its loan, with the government now expecting the $1.25 billion in June. In its announcement, the lender commended Egypt’s efforts to restore investor confidence and said the central bank agrees on the need to bring inflation to single digits in the medium term.

“We are confident that the central bank has the tools to achieve this,” Chris Jarvis, the IMF mission chief for Egypt, said in the statement.