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Economy - Development

Egyptian urban inflation rises

afrol News, 10 September - Rising food prices has driven inflation in urban parts of Egypt above market forecasts to a 16-year high of 23.6 percent in the year to August, piling pressure on central bank to raise interest rates for the sixth time this year.

The figure, a fresh 16-year-high, compares to 22.0 percent in the year to July, state-run statistics agency CAPMAS said on Wednesday. Prices in urban areas in the month of August rose 2.4 percent, compared to 2.2 percent in July, added state agency.

Prices in the country as a whole went up even faster, at 25.6 percent compared with 23.1 percent in the year to July, it said. Economists have focused on the urban index because the countrywide index was previously updated every other month.

Most economists have already been expecting central bank, which has raised overnight borrowing costs by 225 basis points this year, to hike them again by 50 basis points when its monetary policy committee meets again on September 18.

"It is a very negative surprise that inflation continues to accelerate in Egypt," said Dorothee Gasser-Chateauvieux, a senior economist at ING bank in London. She said she had expected inflation to stabilise at around 22 percent.

"The big problem now is that we are unlikely to see the CPI (consumer price index) below 20 percent before the end of the year, and by June 2009 we should still have a reading of around 13 to 14 percent, which is still very high," she told Reuters.

With the economy growing at its fastest pace in decades, rising inflation has emerged as a tough challenge for government in a country that has low per capita income and high poverty relative to its neighbours, especially other Middle East nations.

Soaring food prices triggered violent protests in some areas in the country this year. This prompted government to raise public sector salaries by 30 percent and then nudge up fuel prices to finance wage increase.

Simon Kitchen, senior economist at investment bank EFG-Hermes, attributed rising inflation largely to build-up to Muslim holy month of Ramadan, during which Egyptians hold massive banquets to break their daily dawn-to-dusk fast.

Official data appear to support this. As for much of the past year, food prices were one of the major driving forces behind increase in inflation in the year to August.

In urban areas food prices rose 30.9 percent, faster than for any categories other than education at 38 percent and hotels and restaurants at 45 percent.

Kitchen said there was room for central bank to raise interest rates two more times in 2008. Overnight rates stand at 11 percent for deposits and 13 percent for lending.

Many economists, however, doubt that tight monetary policy alone can help curb inflation because of abundant liquidity in the banking sector and a low loan-to-deposits ratio.

Gasser-Chateauvieux said raising interest rates to maintain bank's credibility could backfire.

"I don't think they should hike," she said. "It does not work anyway and it could be tricky for Egypt to continue hiking rates when it still has a very high public debt level."

The central bank also faces a tough balancing act in allowing Egyptian pound to rise against the euro, a move that could, as Kitchen says, have "anti-inflationary effects in the medium-term" but that may hurt exports to Eurozone.

The Euro has lost 3 percent against Egyptian pound in past two weeks. European Union takes about 40 percent of Egyptian exports and accounts for about 50 percent of tourist arrivals.

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