4 reasons for this expectation 1. The current core inflation rate is 2x the target and is expected to reach 3x the target by the end of 2022.
The announced target so far is 7% + or -2%, but the annual core inflation rate – which is the most accurate measure of demand-induced inflation at the present time – reached 16.7% in August.
It is expected that it will reach 20% by the end of the year, especially if the government rationalizes energy subsidies again on October 1 (which is expected) and with the government’s intention to raise electricity prices at the end of 2022 after postponing the decision for 6 months in the middle of the year.
2. The sharp rise in the issuance of reserve money issued by the Central Bank since the beginning of the year. Reserve money = current bank deposits with the central bank + banknotes outside the central bank.
From the beginning of 2022 to the end of August, the volume of reserve money increased by about 30% due to the government’s use of facilities to finance the budget deficit in light of the high-interest rates required from banks in the bids of bills and bonds during the first half of2022.
The increase in reserves is the first link in the increase in the money supply, as banks use the excess liquidity (excess reserves), which were provided by the CBE in lending to individuals, companies, and the government.
3. Expect the Fed to raise key interest rates by as much as 1% on September 21, 2022. Given the high probability of a decrease in the exchange rate in Egypt by about 10-15%, it is necessary for the CBE to raise interest rates by a large percentage during periods of restricted monetary conditions so that the EGP retains its attractiveness, whether for Egyptians or foreigners.
4. In view of the imminent conclusion of negotiations with the International Monetary Fund, it is necessary to take into account the measures taken in countries that request funding, such as Egypt, and their inflationary impact in the short term.
In Lebanon, fuel subsidies were completely lifted in the past few weeks, and in Tunisia, the price of gasoline was increased 4 times this year until it reached 75 cents per liter.
Therefore, in order for inflation expectations to be stabilized and to prevent the temporary inflation shock resulting from an adjustment of some administratively determined prices from turning into chronic inflation, a “liquidity drain” must be carried out during this delicate surgical operation in order to avoid bleeding in the exchange rate and exchange rates. inflation in 2023.
Final Note Raising the interest in these circumstances is called an interest rate defense, and its aim is not to restrict the aggregate demand for an extended period, but rather for a very limited period, often lasting only 6 to 9 months.