Egypt Inflation Accelerates, Shattering Rate Cut Hopes

(Bloomberg) -- Egypt’s annual inflation rate accelerated for the third month to an eight-month high, dashing hopes the central bank may cut borrowing costs amid rising oil prices and declining foreign interest in local debt.

Consumer prices rose by 16 percent in September in urban parts of the country, their fastest pace since January, according to the report Wednesday by the state-run statistics agency. That puts the annual figure at the ceiling of the central bank’s target range of 13 percent, plus or minus 3 percentage points. Month-on-month inflation quickened to 2.5 percent, reversing two months of deceleration.

Core inflation, a measure that strips out volatile and regulated items, slowed slightly to 8.6 percent from 8.8 percent a month earlier. That suggests food prices were the main reason for the jump in the headline rate. They rose by a monthly rate of 4.8 percent -- the fastest since January 2017, according to Bloomberg data.

“With inflation at such a level, it has now become almost certain that we won’t see rate cuts in 2018 or even the first quarter of 2019,” said Mahmoud El Masry, an economist at Pharos Holding in Cairo. “Oil prices are rising globally, and the government may now cut fuel subsidies before mid-2019, which would take a toll on inflation.”

Economists have said lower rates are necessary to reduce the cost of government borrowing, achieve the budget deficit target of 8.4 percent of gross domestic product this fiscal year and encourage investments. But such a step would also risk deepening the flight of foreign cash pumped into Egyptian treasury bills and bonds -- an outflow that reached around $7 billion in the four-months to August.

“We were at a point where the central bank needed to hold rates,” El Masry said. “Now we’re looking at the possibility of even higher rates.”

Egypt’s inflation rate soared past 30 percent last year after the currency was floated in 2016 to ease a crippling dollar shortage, revive investor interest and finalize a $12 billion International Monetary Fund loan.

The flotation, which halved the Egyptian pound’s value against the dollar, was part of a broader reform push that included rate increases and energy subsidy cuts. The central bank started this year to reverse the rate hikes, but has held borrowing costs steady at the past four monetary policy meetings.

To contact the reporters on this story: Tarek El-Tablawy in Cairo at teltablawy@bloomberg.net;Ahmed Feteha in Cairo at afeteha@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Tarek El-Tablawy

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