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Thursday, 11 June 2020

Egypt’s inflation decelerated in May to 4.7%, below expectations

We caught a break: Inflation cools to six-month low: Annual urban inflation in May slowed to its lowest level since November, dropping to 4.7% from 5.9% in April, according to data from state statistics agency Capmas.

Food and beverage prices continue to be the main drivers: Food prices fell 0.7% on an annual basis during the month — in a reversal to the 4.4% spike in April — and 0.4% on a monthly basis.

Core inflation falls: Annual core inflation fell to 1.5% in May from 2.5% in April, while monthly core prices fell to 0.3% from 1% the month before, according to figures released by the Central Bank of Egypt (pdf).

Figures came in lower than expected, paving the way for <9% annual inflation: “The May inflation figures are lower than expected because of the drop in food and beverage prices after Ramadan,” Radwa El Swaify, head of research at Pharos Investment Bank, told Enterprise. “We expect June figures to rise to 6% an annual basis, drop to 5.5% over July and August, and reach 6.5% for September and October, and 7-7.5% for November and December, to the end the year below the CBE’s 9% target.” Capital Economics also said in a statement (pdf) that they expect the headline rate to fall within the CBE’s target range, even as the EGP weakening against the greenback and the recent announcement of electricity price hikes are likely to drive up inflation.

Effect of higher electricity prices, FX rate might still be muted: Prime Holding Senior Economist Mona Bedeir doesn’t expect the electricity price hikes and FX rate to have much of an effect on 2H2020 inflation readings, however. Bedeir notes the currency had seen some appreciation earlier in the year that will help offset the recent dip, and commercial and industrial consumers were exempt from the electricity price hikes, “which will limit the probability of a second-round effect on final prices.”

Leeway for more rate cuts? Analysts are divided on what this means as the central bank meets a week from today to discuss interest rates. Pharos El Swaify sees rates being left on hold as does Naeem’s Allen Sandeep, who expects “the status quo to continue” despite the CBE now having a little more theoretical room to cut rates. Capital Economics, however, said that “with policymakers’ focus shifting away from supporting the EGP to boosting the economy, we expect interest rate cuts to resume in the coming months.”

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