Pharos Holding Egypt MPC Watch: Expect MPC to Hold Rates Unchanged

Food prices continued to push the monthly inflation rate upwards in January

The urban headline inflation rate accelerated from 23.3% YoY in December to 28.1% YoY in January on unfavorable base-effect from the corresponding period in 2016. Meanwhile, the monthly headline inflation rate rose from 3.1% MoM in December to 4.1% MoM in January, reflecting a continued inflationary pressure from food and beverage items following the EGP flotation, the implementation of the value-added tax and the recent fuel price hike.

Leading signs suggest that the monthly inflation rate may be leveling off in February

February’s initial figures show a decrease in steel, cement and fodder prices compared with January’s prices. We also note that the recent exchange rate movement trend should ease inflation expectations. This supports our earlier argument that the inflation rate will likely accelerate within the first 2-3 months of flotation before leveling off.

MPC to hold interest rates unchanged on Thursday’s meeting

We reiterate that the current inflation rates reflect transitory cost push dynamics, following the economic reform measures undertaken in November 2016. Moreover, we note that the MPC’s decision to raise the interest rate by 300 bps in November 2016 targets containing the second round effect by altering consumers’ behavior towards more savings. Such an interest rate hike helped increase local currency deposits at commercial banks by EGP122 billion in November and December 2016 (versus an average increase of around EGP20 billion in Jan-Oct 2016). In addition, sales volumes across different sectors suggest that demand-pull inflation risk remains on the downside. Therefore, given the aforementioned inflation outlook, we expect the MPC to keep interest rates unchanged in the next meeting on the 16th of February 2017, since the costs of a rate hike outweigh potential benefits at this point.