How the Russia-Ukraine War Affects Egypt’s Inflation

May 19, 2022


Egypt saw its highest inflation rate in almost two and a half years in April, and analysts expect it to remain high throughout 2022. As the country wrestles with the global turmoil of the Russia-Ukraine war and lingering global supply chain disruptions, the Central Bank of Egypt (CBE) is trying to find the right balance of interest rates to contain the spiraling prices.

The Monetary Policy Committee (MPC) of the CBE decided on May 19 to raise interest rates for the second time since March by 200 basis points, bringing the overnight deposit rate, overnight lending rate, and the rate of the main operation to 11.25%, 12.25%, 11.75%, respectively. The discount rate was also raised to reach 11.75%.

This decision comes as inflation continues to accelerate and rising global rates put pressure on portfolio flows.

“Global economic activity has slowed down due to ongoing tensions between Russia and Ukraine. Trade sanctions imposed on Russia and corresponding supply-chain bottlenecks have elevated global commodity prices, such as international prices for oil and wheat, with the latter’s global supply also impacted by adverse weather conditions and poor harvests in select regions,” the CBE statement said.

Egypt’s annual headline inflation rate accelerated to 13.1 % in April, up from 10.5% recorded in March and 4.4% in the same period last year, according to the CBE.  Monthly headline inflation recorded 3.3% in April, mainly driven by the rising prices of food commodities and services. 

These rates significantly exceed CBE’s target, set in December 2020, of 7% (±2%) through the end of 2022. 

In March, the CBE raised its key interest rates in an unscheduled meeting by 100 basis points (bps) and devalued the Egyptian Pound by 16%, prompted in part by an outflow of foreign currency triggered by investor unease following Russia’s invasion of Ukraine. 

Capital outflows from the Egyptian market since the onset of the war in Ukraine are estimated at $20 billion, said Prime Minister Mostafa Madbouly at a May 15 press conference. He pointed out that Egypt is bearing around EGP 130 billion in losses due to the war.

Egypt lowered its projection for the country’s real GDP growth in the upcoming fiscal year, which starts July 1, to 5.5% down from 5.7% in March.


The Russia-Ukraine war has accelerated inflation worldwide by disrupting the supply of food commodities and other staples, says Banking Expert and Consultant at Alraya Consulting Hany Abou-El-Fotouh. The International Monetary Fund (IMF) projects that the global economy could lose $1 trillion and the global inflation rate could rise by 3% in 2022 as a result of the war.

“Egypt’s inflation will continue to rise on the back of cost spikes not the increase in cash supply from war. Interest rate hikes and the devaluation of the Egyptian Pound can contribute to speeding up the country’s inflation rate due to an increase in the operation and production costs,” Abou-El-Fotouh explains.

Going forward, Abou-El-Fotouh expects the CBE to further tighten its monetary policy by raising the key interest rates by up to 400 bps through the end of 2022 to contain the rising inflation.

The CBE’s decisions on Egypt’s key interest rates are being made in light of the global economic developments, chiefly the updates on the US Federal Reserve (Fed)’s benchmark interest rates.

Since Russia’s invasion of Ukraine started, the Fed has hiked benchmark rates by 75 bps, saying it targets a 280 bps rise by end of 2022.

Inflation was heating up even before the war, however, the rebound in global demand and consumer activity since mid-2020, together with supply disruptions and rising food and energy prices, had already pushed headline inflation to decade highs in many countries at a faster-than-anticipated pace, says Heba Monir, head of banking and financial services sector at Arab African International Securities.

“Egypt’s annual headline urban inflation started to pick up significantly since the beginning of 2022,” Monir points out. According to CBE data, urban inflation recorded an average of 8.8% in the first quarter (Q1) of 2022, while it averaged 4.41% in Q1 2021.

She attributes the most recent spikes in the inflation rates to hikes in commodity prices and escalating energy costs in international markets.

“These combined factors are anticipated to affect specifically the food and transportation prices, which will consequently affect all other segments.” 

Increases in inflation rates, domestically and globally, will continue over the coming period.

Based on that, Monir expects annual headline urban inflation to jump to 14.8% in Q2 2022, up from 4.6% in Q2 2021.