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Wednesday, 13 March 2019

Ignore February’s inflation data: The CBE could still cut rates this month- Capital Economics

Ignore February’s inflation data: The CBE could still cut rates this month, Capital Economics suggests: February’s unexpectedly high inflation rates are unlikely to deter the Central Bank of Egypt (CBE) from pushing ahead with rate cuts — and it may even opt to ease further this month, Capital Economics has said in a report. Data this week showed that headline inflation rose to 14.4% in February from 12.7% in January, driven by rising food, utilities and transportation costs. Still, strong capital inflows and “subdued pressure” on core prices mean that the central bank could cut during the next MPC meeting on 28 March. “The latest inflation reading has clearly made the outcome of the next MPC meeting more uncertain. But we still think that a further rate cut is more likely than not,” the report says.

Are core price pressures actually subdued? Core inflation increased to 9.2% last month from 8.6% in January. Capital Economics argues though it remains “relatively subdued” as it does not stray too far from the mid-point of the CBE’s target range and is still one of the lowest rates seen over the past three years.

Upcoming subsidy cuts also make easing more likely: Capital Economics suggests that the CBE may want to get a rate cut in before the government trims subsidies in July. Why? Cutting subsidies will cause higher short-term inflation, making it harder for the central bank to ease in the summer months.

What are other analysts saying? As we noted earlier this week, there is no consensus among analysts on what to expect heading into this month’s MPC meeting. Both EFG Hermes’ Mohamed Abu Basha and Naeem Brokerage’s Allen Sandeep predicted that the CBE will hold off on easing for the time being, while Radwa El Swaify at Pharos is calling another cut.

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