January 10, 2017 / 7:09 AM / 6 months ago

REFILE-UPDATE 2-Egypt's cost-of-living soars as currency dives

3 Min Read

(Corrects source in paragraph 2 to central bank, not official statistics agency)

By Asma Alsharif

CAIRO, Jan 10 (Reuters) - Annual consumer price inflation in Egypt's cities soared to a second straight eight-year high in December, hitting 23.3 percent on the back of the government's decision to float the pound, effectively halving its value.

Core inflation also jumped to 25.86 percent in the urban areas, the central bank said on Tuesday.

Urban consumer inflation hit an eight-year high of 19.4 percent in November, the month when Egypt abandoned its currency peg of 8.8 to the U.S. dollar in a dramatic move that has since seen the currency depreciate roughly by half.

It accompanied the Nov. 3 move with a 300 basis point interest rate hike to fight inflationary pressures.

Despite the hike, however, inflation has risen sharply and is expected to climb further this year as the government pushes on with economic reforms, including fuel subsidy cuts and the implementation of a value-added tax.

Those moves were required to secure a $12 billion International Monetary Fund loan.

In cities and towns, food and beverage inflation touched 28.3 percent in December. Healthcare inflation stood at 32.9 percent while transportation was 23.2 percent.

"Egypt now is in the eye of the policy restructuring cycle, and the price is higher inflation and an overall fiscal deficit pending a structural change in government spending and general re-pricing of goods and services," Arqaam Capital said in a research note.

"A reversal of over 50 years of comprehensive government support will take time," it said, predicting inflation to remain high in the first half of the year, averaging 20 percent in 2016/17 before declining to 18 percent in 2017/18.

President Abdel Fattah al-Sisi is under increasing pressure to revive the economy, keep prices under control and create jobs to avoid a backlash from the public.

Sisi predicted last month that the Egyptian pound would strengthen in the coming months and promised to ensure basics were available and affordable.

The government has expanded its social security network and some 70 million Egyptians have access to state subsidised bread.

But Egypt's non-oil business activity shrank for the 15th consecutive month in December as inflation caused purchase costs to rise at a near-record pace.

Economists expect the rising inflation to erode spending power, hit economic growth and prompt further hikes to interest rates, which are already up to 15.75 percent.

Egypt's central bank has held interest rates steady at two monetary policy meetings since the flotation and some economists expect further rate hikes this year.

The monetary policy committee is due to meet again on Feb. 16. (Editing by Himani Sarkar and Sunil Nair/Jeremy Gaunt)

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