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Cablegate: Inflation Still a Worry for the Egyptian Central

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DE RUEHEG #2062 2651414
ZNR UUUUU ZZH
P 211414Z SEP 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 0517
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS CAIRO 002062

SENSITIVE
SIPDIS

DEPT FOR NEA/ELA
TREASURY FOR BEN DENNIS AND CHARLES MORAVEC
COMMERCE FOR TOM SAMS AND NATE MASON

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV EG
SUBJECT: INFLATION STILL A WORRY FOR THE EGYPTIAN CENTRAL
BANK

1. (U) Summary: The Central Bank of Egypt (CBE) raised key
lending and deposit rates by 50 basis points on September 18.
Year-on-year inflation was 25.5% in August, and the latest
move by the CBE reflects its worries over continued
inflationary pressure on the economy, even as it noted that
food price increases appear to be slowing. Ramadan price
increases along with increases in educational fees are
expected to lead to another month of rising inflation in
September. Local analysts expect inflation to slow from the
fourth quarter into 2009. End Summary.

2. (U) On September 18, the Monetary Policy Committee of the
Central Bank of Egypt (CBE) raised key overnight lending and
deposit rates by 50 basis points to 13.5% and 11.5%
respectively. The CBE also raised the discount rate by 50
basis points to 11.5%. The latest rate hikes mark the sixth
time this year the CBE has raised rates, for a total increase
of 275 basis points since January.

3. (U) The CBE action comes a week after the GOE released
August inflation figures which showed yet another marked
increase in the CPI. The official Egyptian government
statistical agency, CAPMAS, reported a year-on-year CPI
increase of 25.5% in August, compared to 23.1% in July. Food
inflation, though increasing at a slower rate than in
previous months, was a significant contributor to the
increase. (Note: Food prices, in particular, tend to rise
during Ramadan and the weeks leading up to it. Ramadan began
on September 1. End note.)

4. (U) In its statement, the CBE noted that prices had risen
more slowly for basic food products as a result of lower
international commodity prices, the temporary ban on rice
exports imposed in the spring, and removal of certain food
import tariffs, though it noted that retail prices tended to
be rigid and had not yet reflected lower costs. The CBE said
that non-food inflation continues to be high.

5. (SBU) Comment: The next meeting of the Monetary Policy
Committee of the CBE will be November 6. Local economists
suggest further rate hikes may be in the cards. The
government is expected to report an additional increase when
it reports September's CPI as further increases in food
prices along with higher prices of education fees and butane
gas (used in home heating and cooking) are reflected.
Inflationary pressures are expected to ease in the fourth
quarter of 2008 and the first quarter of 2009, which should
bring an end to this phase of central bank tightening.
Analysts expect inflation for 2008 to average 20%.
SCOBEY

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