Will inflation force CBE to increase pound interest rate on Thursday?

MPC holds its fifth meeting on Thursday to look into the destiny of basic yield prices in the CBE amid uncertainty about its decision

The Monetary Policy Committee (MPC) in the Central Bank of Egypt (CBE) will hold its fifth meeting this year on Thursday to look into the destiny of the prices of the basic yield, the main indicator of the interest rates trends in the Egyptian market.
The CBE decided to increase the prices of its basic interest rates by 2% on 18 July 2017 to take the total increase decided by the bank to 7% since the decision to liberalise the exchange rate on 3 November 2017.
The main interest rate in the CBE currently is 18.75% for depositing and 19.75% for loaning, in addition to 19.25% for prices of credits, discounts, and CBE's main operation.
On its meeting on 18 July 2017, when the interest rate was increased by 2%, the MPC stressed that increasing the pound's interest rate is a temporary procedure that aims to deal with the impacts of inflation, which has reached its highest level in history.
In a statement that accompanied revealing the decision, CBE pledged to take inflation down to 13% by the last quarter (Q4) of 2018.
Last Thursday, the CBE announced that basic monthly inflation increased by 2.76% by the end of July 2017 compared to 1.8% by the end of June. Annual inflation increased to 35.76% compared to 31.95%.
The data from the Central Agency for Public Mobilization and Statistics (CAPMAS) showed that the annual inflation rate in Egypt jumped to 33% in July, compared to 29.8% in June—the highest since 1986, when it reached 35.1%.
The increase in inflation rates in the cities of Egypt came after the government increased petroleum product prices the end of June 2017 for the second time in eight months, and the increase of electricity and water prices in July 2017.
The increase in inflation has raised many speculations about the CBE's next move regarding the pound's interest rate with the basic yield prices in the CBE reaching unprecedented levels never witnessed before by the Egyptian market with strong speculation of the inflation increasing greatly over the upcoming period.
Radwa El-Swaify, head of the research centre in Pharos Holding, said that inflation could increase in August and September 2017 to reach 36%.
El-Swaify pointed out that it is likely for the CBE to maintain the current levels of the basic yield prices, noting the past increases carried out by the CBE in these prices are enough to face inflation, which is mainly the result of the increased prices rather than the increased demand.
For his part, Ossama El Manialawy, assistant director of the financial sector in one of the banks working in the local market, expected an increase in interest rates to take place on Thursday by 1-2%.
El Manialawy pointed out that despite the increase of interest rate prices by nearly 7% since the liberalisation of the exchange rate in November 2016, the increase has not been able to cover the inflation rate increases, which reached 35% by the end of July 2017, which requires carrying out another increase in the pound's interest rate.
British Capital Economics expected the vanishing of the impacts of exchange rate liberalization to contribute to reducing inflation faster than usual by 10% to reach less than 20% by the end of this year and less than 10% by the end of 2018.
The foundation pointed out that inflation has reached its highest rates since July 1986 but only as a result of temporary factors whose impacts are expected to vanish throughout the next six to nine months.
"We believe inflation has reached its peak and is likely to decline faster than usual, paving the way for a less restrictive monetary policy," Capital Economic added.
It expected the CBE to reduce its interest rates by 1% in December and by 5% in 2018 then by 2% in 2019.