The Central Bank of Egypt will increase its benchmark rate to 11.50 per cent next month and a further 50 basis points after that to close the year at 12 per cent, investment bank Merrill Lynch has forecast.
The tightening comes on the heels of fears that consumer price inflation has not yet run its course in Egypt, with the CPI rate expected to peak in the third quarter of this year.
CPI inflation has surged to 22 per cent as of July from 6.9 per cent in December. "While index-heavy food prices (44 per cent share) are the main culprit (up 30 per cent year-on-year), higher energy prices and wage increases caused a broad-based surge," Merrill analyst Turker Hamzaoglu wrote in a weekly economic note.
"Hotel and restaurant prices are up 45 per cent yoy as of July, education costs 40 per cent yoy, recreation and culture 30 per cent yoy and transportation prices 20 per cent yoy.
"Food prices are likely to further increase in the run up to Ramadan. We expect CPI inflation to end the calendar year at 23 per cent and fall to 13 per cent at the end of 2009."
Merrill blames the surge in prices to a policy mistake in early May when President Mohammed Hosni Mubarak announced a 30 per cent increase in public sector wages, which came as an "unpleasant surprise" to the markets.
"Government efforts to raise finance for the pay rise through lower energy subsidies, higher administrative prices and taxes were prudent. But the cost was enough to make us and many others cautious on the macro outlook of higher inflation, higher rates and slower growth," he said.
The home-grown deterioration in Egypt's inflation outlook came at a time when oil prices were running sharply up to $150 per barrel, keeping inflation concerns at the top of the global agenda. Oil prices have fallen sharply since mid-July and concerns on the growth outlook across the globe took the front-seat. "The inflation outlook for many emerging markets has improved lately. Our emerging EMEA economists mostly forecast a peak in inflation in the third quarter of 2008 and that rate cuts will follow in 2009. We are more cautious on Egypt, seeing inflation peak in early Q4-08."
Surging prices have hurt Egyptian consumers, 40 per cent of whom live either under or close to the poverty line of $2 a day.