Global price spike to hold back Egypt interest rate cuts: Bloomberg poll

Surging global prices for everything from food to fuel will give Egypt little reason to touch the world’s highest real interest rate on Thursday, according to a Bloomberg poll.

The Egyptian central bank‘s Monetary Policy Committee (MPC)  is set to convene on Thursday — for the fourth time in 2021 — to review the key interest rates.

According to Bloomberg, Egyptian consumer costs are already increasing at their fastest pace this year and authorities will be keen to keep the sizable gap between inflation and policy rates that has made the nation’s debt a favourite with overseas investors. All but one of 10 economists surveyed by Bloomberg forecast the central bank will hold its benchmark deposit rate at 8.25 percent for a fifth meeting.

Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, told Bloomberg that he predicts a hold, saying: “Egypt has a good margin of real rates, but it’s now time to see how much of that could be eaten away when imported inflation starts to hit home,”

Egypt, a major wheat importer, could feel the impact this summer, as a South American drought hits key crops like corn and sugar and a supply crunch in grains raises costs for global livestock producers, potentially sending the world’s food-import bill to an all-time high, Bloomberg added.

The increase in food costs has echoes of 2008 and 2011, when surges led to unrest in more than 30 nations. And as broader inflation accelerates, it is also complicating central banks’ efforts to pump more stimulus into economies riding out the coronavirus pandemic, Bloomberg noted.

Consumer prices in urban parts of Egypt are already accelerating on the back of food and beverage costs, growing an annual 4.8 percent in May compared with 4.1 percent the month before.

Goldman Sachs Group Inc. told Bloomberg that it predicts inflation will surge at close to 6 percent in August if the Egyptian government increases domestic fuel prices to reflect a global oil rally. Even that figure is within authorities’ target range of 5 percent -9 percent by the end of 2022.

According to Bloomberg Barclays indexes, Egypt’s local-currency bonds have gained 5 percent this year — the best performer in emerging markets after debt issued by Argentina and South Africa.

The North African country’s tight monetary stance “is driven in large part by the aim of maintaining and attracting capital inflows” while other sectors remain vulnerable, Farouk Soussa, a Goldman economist, told Bloomberg.

Any easing of rates may not come until the fourth quarter when the global economy should benefit from its gradual reopening from COVID-19 and tourism recovers, Soussa explained.

Even then it might be 2022 before Egypt sees another cut, Abu Basha told Bloomberg, citing “alarming” inflationary risks around the world and recent rate hikes in other emerging markets such as Russia, Brazil, and Ukraine.