June 8, 2017 / 11:15 AM / 10 months ago

UPDATE 2-Egypt inflation eases for first time since currency float

(Adds core inflation)

By Arwa Gaballa

CAIRO, June 8 (Reuters) - Inflation in Egypt eased in May for the first time since the country let its currency float free last year, but remained just a tad below 30 percent, a number that is unlikely to ease pressure on the government of President Abdel Fattah al-Sisi.

Sisi, who took office in 2014 after ousting the former Muslim Brotherhood administration, is facing an uphill struggle to revive the economy, control prices and create jobs.

In November, Egypt abandoned its currency peg of 8.8 pounds per dollar, which led to both the pound halving in value and to inflation shooting up. It was at a year-on-year high of 30.5 percent in April.

The official CAPMAS statistics agency said on Thursday this had eased, with annual urban inflation falling to 29.7 percent in May.

Over the same period, core inflation eased to 30.57 percent year on year in May from 32.06 percent in April, the central bank said.

The bank has been trying to keep the pound stronger and inflation lower. It raised key interest rates by 300 basis points when the peg was droppe, helping it to clinch a $12 billion International Monetary Fund programme.

Last month, the central bank raised key rates by another 200 basis points, a decision aimed at dealing with inflation as well as demand-side pressures. It came after the IMF said action on those two factors was vital to keeping Egypt’s economic reforms on track.

Economists, businessmen and bankers, however, say inflation in Egypt — where only 10 percent of the population have bank accounts — is due to rising raw materials costs and a hike in rates will not produce the desired effect.

So May’s fall, while suggesting the huge spike may be over, is not necessarily a signal of longer-term improvement.

“This slight dip doesn’t mean Egypt has passed the inflationary pressure caused by November’s currency float. The Egyptian pound would have to strengthen and production would need to increase for inflation to see a real decline,” said Ehab al-Dessouki, a Cairo economist.

“The slight dip also shows that last month’s rise in interest rates wasn’t as effective as anticipated.”

Another economist said the latest figures show inflation is stabilising, but warned of upward pressure to come.

“I think we have passed the inflationary pressures driven by the float, but there are new reforms coming up that may take inflation higher,” said Hany Farahat of CI Capital.

The three-year IMF loan deal is tied to sweeping economic reforms including subsidy cuts.

The IMF last month backed Egypt’s plan to end fuel subsidies within three years but said the timing of any price hike was up to the government.

“As for petroleum subsidy cuts, they are inevitable ... then we expect inflation will revert to the upside for sure,” Farahat added.

The figures coincided with boosts to foreign investment in domestic debt and an announcement that the government is pushing ahead with regulations to implement a new law designed to encourage foreign investment.

Reporting by Amina Ismail and Arwa Gaballa; Writing by Amina Ismail; editing by Giles Elgood/Jeremy Gaunt

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