Why Rate Increase Is No Answer to 30 Percent Inflation in Egypt

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 percent 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 U.S. dollar and annual inflation has risen above 30 percent, 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 percent 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 percent next fiscal year, and ease to 9.7 percent the year…

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