Global Price Surge to Hold Back Egypt Rate Cuts

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Spiking global prices for everything from food to fuel are giving Egypt little reason to touch the world’s highest real-interest rate on Thursday.

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

“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,” said Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, who predicts a hold. Egypt cut a combined 400 basis points last year.

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.

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

Consumer prices in urban parts of Egypt are already accelerating on the back of food and beverage costs, growing an annual 4.8% in May compared with 4.1% the month before. Goldman Sachs Group Inc. predicts inflation will spike at close to 6% in August if the government increases domestic fuel prices to reflect a global oil rally. Even that figure is within authorities’ target range of 5%-9% by the end of 2022.

Egypt’s local-currency bonds have gained 5% this year -- the best performer in emerging markets after debt issued by Argentina and South Africa, according to Bloomberg Barclays indexes. The country’s tight monetary stance “is driven in large part by the aim of maintaining and attracting capital inflows” while other sectors remain vulnerable, said Farouk Soussa, a Goldman economist.

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, he said.

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

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