RenCap sees muted consumer demand keeping inflation below CBE target this year: Inflation in Egypt should close out 2020 just below the Central Bank of Egypt’s (CBE) inner band target of 6-12% as consumption — particularly of food and beverages, which typically drive up inflation — is still “depressed,” Renaissance Capital said in a research note yesterday. The only scenario in which inflation figures would come within the CBE’s inner band target is if food prices rise 0.75% per month, which the firm says is not a probable scenario. “On our calculations, non-food monthly inflation has averaged 0.3% YtD and is expected to remain at these levels on the back of depressed consumer demand (except in October to reflect the annual increase in school tuition fees).” The firm sees inflation coming in at 5.1% in December and averaging at 4.5% in 4Q2020, as long as food prices don’t sustain any shock effects.

If inflation does fall outside targets, the CBE will be expected to take measures to restore inflation to be within its targeted range, as per Egypt’s 12-month stand-by arrangement with the IMF. RenCap says that the CBE will not necessarily cut rates to nudge inflation back up, but could instead take other monetary policy routes. One possible scenario is “canceling the 12-month 15% high-yielding certificates of deposits (CDs), which have attracted EGP 380 bn since issuance. This should be supportive of growth, equities and banks net interest margins.”