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Sunday, 12 March 2023

Inflation surges to five-and-a-half-year high in February, far above analysts’ expectations

Inflation surged to a fresh high in February on the back of a record increase in food prices amid the ongoing depreciation of the EGP and higher demand going into Ramadan. Figures released on Thursday by state statistics agency Capmas showed that annual urban inflation jumped 31.9% y-o-y in February, up from 25.8% the month before. Inflation is now at its highest since July 2017, when it was running at almost 33%.

This was much faster than expected: Goldman Sachs and Naeem Holding had predicted inflation to come in at around 28%, according to Bloomberg, while the median forecast in a Reuters poll of 14 economists had inflation accelerating to 26.7%.

Monthly inflation at 16-year high: Monthly headline inflation accelerated to 6.5% from 4.7% in January — its sharpest incline since March 2007, according to Bloomberg.

And record core inflation: Core inflation — which strips out volatile items such as food and fuel — stood at 40.3% y-o-y in February, according to central bank data (pdf). That’s the highest core inflation figure since the central bank began releasing the data in 2009, per Reuters. Monthly core inflation jumped to 8.1% from 6.3% in January.

Food price inflation hits record high for second month running: Annual inflation for food and beverages — a key component of the basket used to measure the headline rate — rose further to 61.8%, shooting past the previous record high of 48.0% the month before. Food prices were 14.4% higher compared with the month before, after rising 10.1% m-o-m in January.

Not just the weakening EGP: “Supply disruptions and speculative behavior are clearly playing a bigger role in pushing prices higher rather than a pure reflection of a weakening EGP,” Mohamed Abu Basha, EFG Hermes Holding’s head of macroeconomic research, said in a note. Egypt has already devalued its currency three times over the past year, causing it to lose almost half of its value against the greenback.

The data will add to calls for the central bank to hike rates: The central bank’s Monetary Policy Committee (MPC) is now widely expected to hike rates when it meets on Thursday, 30 March. The MPC kept rates on hold in a surprise move at its last meeting in January, saying it would wait to see the full impact of the 800 bps of hikes it made in 2022 to counter high inflation.

Some analysts are calling a huge rate-hike — possibly in an unscheduled meeting: Goldman Sachs is expecting the CBE to increase interest rates by as much as 300 bps this month in response to the inflation data, according to Bloomberg. “Containing inflation expectations and, in particular, improving domestic FX liquidity to ease chronic pressure on the EGP will require the Central Bank of Egypt to pursue tighter monetary policy in the coming months,” Goldman MENA economist Farouk Soussa said in a report. Meanwhile, Naeem Brokerage thinks the central bank may call an “emergency meeting” ahead of raising rates by 200-300 bps.

REFRESHER- Fresh social support measures land next month. The government will from April raise public-sector wages and pensions and provide tax relief by raising the income tax exemption threshold, part of a fresh round of support to help households handle rising bills. The support program is expected to cost the public purse some EGP 190 bn.

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