Price shocks in Egypt likely to hit well into 2018: Capital Economics

Egypt will see prices fluctuate well into the latter half of 2018, as the market responds to the liberalizing of the currency and higher fuel prices, London-based Capital Economics said in a report on Monday.

Inflation will climb by more than 20 percent, the report predicts, before it begins to ease in mid 2017, with most price rises likely to remain in double digits until later in 2018.

Egypt’s Central Bank liberalized the exchange rate on Thursday, leaving the value of the pound to the discretion of the banks. Although the pound began at a guidance price of LE13 to the dollar, it quickly weakened to LE17.25 to the dollar on Monday at the National Bank of Egypt, and LE16.9 at the Commercial International Bank.

The annual inflation rate hit 14 percent in September, but is likely to increase further as the cost of imports rises, Capital Economics suggests.

Egyptians spend almost 40 percent of their incomes on food and beverages, which are expected to increase in price by 25 percent due to the weakening of the pound.

Meanwhile, fuel subsidy cuts have increased pump prices by up to 47 percent, which could add a further 1 percent hike in inflation, according to Capital Economics’ report, which is based on an exchange rate of LE16 to the dollar, a value that is stronger than the actual rate in banks on Monday.

The Central Bank raised interest rates by 300 basis points, increasing deposit rates by 14.75 percent and lending rates by 15.75 percent, in an effort to curb inflation. State-owned banks have also offered certificates of deposit with 20 percent interest rates for 18 months to further attract liquidity from the market and slow inflation.