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Cablegate: Inflation Rises in June, but Not As Fast As in Previous

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1481 1970539
ZNR UUUUU ZZH
R 150539Z JUL 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9831
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0421

UNCLAS CAIRO 001481

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA AND
USAID FOR ANE/MEA MCCLOUD AND RILEY
USTR FOR FRANCESKI
TREASURY FOR MATHIASON AND DENNIS
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN EINV EG
SUBJECT: INFLATION RISES IN JUNE, BUT NOT AS FAST AS IN PREVIOUS
MONTHS

Sensitive but Unclassified. Not for Internet distribution.

1. (U) Inflation reached 20.2% year-on-year (YoY) in June, up from
19.7% YoY in May, according to Egypt's Central Agency for Public
Mobilization and Statistics (CAPMAS). Food prices increased 27.2%
YoY, up slightly from 27% YoY in May. Speaking just before release
of the inflation figures, Minister of Economic Development Othman
told the press that the price of some items - fruits, meat, tomatoes
and chicken - actually decreased in June. Focusing on the positive,
Othman noted that month-on-month (MoM) food and beverage prices rose
only 0.8% in June, down from 3.6% MoM in May. Overall MoM inflation
was only 0.6% in June, compared to an average MoM increase of 5.5%
in the first five months of 2008. For FY2007-08 (which ended 30
June), inflation averaged 11.7% YoY, up from 11% YoY in FY2006-07,
according to Othman.

2. (U) Anticipating continued inflationary pressure, the Central
Bank (CBE) raised interest rates by 50 basis points in late June, to
10.5% (deposit) and 12.5% (lending). A statement by CBE's Monetary
Policy Committee indicated that as food prices continue to rise, the
spillover to non-food prices remains strong, as does the pass
through effect from adjustments to the fuel subsidy in early May.
While several banks, notably National Bank of Egypt, raised deposit
rates accordingly, the CBE interest rate hike is likely to have
little impact overall, due to the continued high liquidity in the
banking system. Most analysts assert that appreciation of the
Egyptian pound against the U.S. dollar would slow inflation more
effectively than interest rate hikes.

3. (SBU) Comment: While the relatively low increase in inflation
in June is a positive development, inflation is likely to remain
high in the medium term. Ramadan begins in September this year, and
food prices have historically risen during the fasting month. This
year, as last, Ramadan also coincides with the beginning of the
academic year, when families spend more than normal on school
supplies. Media reports about bread lines have decreased
significantly, as the GOE's separation of bread production from
distribution appears to have reduced the black market for subsidized
wheat. In late June, the GOE announced plans to form a committee to
develop the bread subsidy system, including public bakeries and
distribution points, signaling that the government doesn't plan to
alter the food subsidy system in the near future.
SCOBEY

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