Wednesday, 10 February 2021

Headline inflation slowed last month — does it make a rate cut more likely?

Annual headline inflation in January slowed to its lowest level since September 2020. Urban headline inflation dropped for the second consecutive month to 4.3% from 5.4% in December 2020, and closing in on a 3.7% record low reading last September, figures from state statistics agency Capmas (pdf) and the central bank (pdf) showed. On a monthly basis, inflation was -0.4%, as a further drop in food and vegetable prices from an increase in stockpiles and a fall in food exports led to the same pace of deflation recorded in December. The story is getting attention from Reuters and Bloomberg.

Food and beverage prices fell again this month, dropping 1.6% month-on-month and 0.5% y-o-y from January 2020. The price of vegetables fell over 20% on average from December, after having already seen a 10% m-o-m drop in the final month of the year, despite the winter holidays’ effect on seasonal spending. Most other consumer price index constituents were flat.

Annual core inflation — which strips out volatile items — fell to 3.6% in January compared to 3.8% in December. Monthly core inflation, meanwhile, ticked up to 0.5% from 0% in December.

Inflation fell below CBE target: The reading came below the lower band of the central bank’s 7% (+/- 2%) target. The CBE adjusted its target range from 6% (+/-3%) in December after inflation was muted for the better part of 2020 and exceeded its previous target only once. Persistently low inflation previously triggered consultations with the IMF’s technical team late last year under the terms of a stand-by loan agreement.

And below analyst expectations: “Inflation for January 2020 came in much lower than our expectations” on the back of food and vegetable prices, Pharos’ head of research Radwa Elswaify said. Elswaify had expected a higher reading every month throughout the first three quarters of 2021, and a slowdown only toward 4Q20021. “The slowdown in inflation brought down the 2021 expected average level to 5.3%,” Pharos said in a client note this morning.

Momentum looking forward: February should see a m-o-m figure of 0.5% and an annual headline rate of 5.2% and 4.8% in urban parts of Egypt, Elswaify said. Naeem Brokerage echoed Elswaify’s sentiment, saying in a research note that inflation will increase in the near term “on the back of the ongoing surge in global commodity prices.”

Is a rate cut on the horizon? “Since [the] inflation reading came lower than expectations, this raises real rates and improves the chances for a 50 bps rate cut early this year,” Elswaify said. Pharos is yet to confirm its forecast for the upcoming policy meeting. Whether or not we see a cut when the central bank meets next month would “depend on a few variables including upcoming commodity price shocks, including oil and food, liquidity and carry-trade attractiveness,” Naeem Brokerage’s director of research Allen Sandeep said.

The monetary policy committee is due to next meet on 18 March. The MPC left rates unchanged during their most recent meeting on 4 February, citing muted economic activity. The hold was the second in a row. It came after the CBE enacted two consecutive 50 bps rate cuts in each of November and September, and a record 300 bps cut in March — bringing total rate cuts in 2020 to 400 bps.

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