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Egypt consumer inflation jumps to 10.6 pct in July Food, gas prices rise after govt raise energy prices

CAIRO, Aug 10, (RTRS): Egypt’s annual urban consumer inflation jumped to 10.6 percent in July from 8.2 percent in June, the official statistics agency CAPMAS said on Sunday, after the government introduced a fuel price increase last month. Egypt’s economy has been in turmoil since a popular uprising ousted autocrat Hosni Mubarak in 2011, deterring tourists and foreign investors and straining the country’s finances and foreign reserves. Annual core inflation, which strips out subsidised goods and volatile items such as fruit and vegetables, rose to 9.35 percent in July from 8.76 percent in June, the central bank said in a statement later on Sunday.

Annual inflation reached its highest rate in nearly four years in November but has been falling back since then. Analysts expect it to rise again after the government raised energy prices by up to 78 percent in an effort to ease its budget deficit. Gas subsidies were also cut, lifting prices by 30 to 75 percent, and sales taxes on alcohol and cigarettes rose as well in July. CAPMAS head Abu Bakr al-Gindy said last month he expected inflation to rise in July due to the price increases but that the effect would plateau after July.

Despite billions of dollars in aid from Gulf states and two stimulus packages, economic recovery in the most populous Arab nation has been slow. Egypt’s central bank raised interest rates on Thursday, hoping to curb soaring inflation and slow a sliding pound currency, but the first increase in over a year is likely to hurt a very weak economy. The bank’s Monetary Policy Committee (MPC) announced 50 basis point increases in both its main rates, taking the overnight deposit rate to 9.75 percent and the overnight lending rate to 10.75 percent.
 
Before the meeting, economists had been split on whether the bank would raise rates or hold them to avoid further hurting an economy badly damaged by two years of political turmoil and frequent violent protests since the overthrow of president Hosni Mubarak. In the end, the central bank opted to tackle the sharp rise in inflation, which is eating into Egyptians’ living standards, and to support the Egyptian pound. “Despite the downside risks to the GDP outlook, the MPC judges that disanchored inflation expectations are more detrimental to the economy over the medium term. Hence, a rate hike is warranted,” it said in a statement.
 
Risks
In a further blow to economic confidence, Moody’s Investors Service downgraded Egypt’s sovereign credit rating on Thursday to Caa1 from B3, citing unsettled political conditions, and said risks of a default had increased. The pound has lost 9 percent of its value against the dollar since late last year, pushing up the cost of imported goods. Inflation in towns and cities jumped to 8.2 percent in the year to February from 6.3 percent in January. The central bank blamed the jump in inflation on diesel fuel supply problems and “broad-based increases in food and nonfood prices on the back of the recent movements in the exchange rate”. It also acknowledged the effect of Egypt’s turbulent politics. “The current political transformation may continue to have ramifications on both consumption as well as investment decisions, adversely weighing on key sectors within the economy,” it said.
 
Islamist President Mohamed Mursi called parliamentary elections last month which had been due to start on April 22, only for a court to cancel his decree. Much of the liberal and leftist opposition had already said it would boycott the vote. Thursday’s rate rise is likely to hit economic growth, which the government projects will be 3 percent in the year to June - far below the 7 percent that economists believe is required to create enough jobs for a rapidly expanding population. With currency reserves now at a critically low $13.5 billion - little more than a third of the level before Mubarak’s fall - the central bank is tightly rationing dollar supplies through currency auctions.
 
A $4.8 billion loan from the IMF has yet to materialise and many investors and businesses are finding it nearly impossible to get hold of dollars through the banking system. This is forcing them to accept highly unfavourable black market rates, often wiping out their profits. The central bank also said on its website that it had raised its main repo and deposit auction rates by 50 basis points to 10.25 percent and the discount rate by 75 basis points, also to 10.25 percent. It last changed monetary policy in November 2011 when it raised the overnight deposit rate by 100 basis points and the overnight lending rate by 50 basis points.

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