Egypt’s inflation cools as food prices stabilize, likely to extend downward trajectory

Elsayed Solyman
3 Min Read
The past three months had been tough for many Egyptians, as the government introduced a series of new economic measures

Egypt’s annual inflation continued its downward trajectory in October as food prices cooled for the second month in a row.

Annual urban headline inflation inched down to 31.6% in September 2017 from 31.9% in August, as demand driven pressures dissipated and the impact of energy and utility price changes tapered off.

The effect of seasonal (school year start) and one-off (mobile fees hike) factors appeared to be limited in September, according to a recent report by Arqaam Captial.

Monthly inflation stabilised at 1% in September, compared to 1.1% the month before, while the monthly change in food inflation slowed to its lowest level of 0.4% since January 2016, reflecting the lowest demand driven change since the start of the FX crunch and fiscal shocks cycle.

“Headline inflation is proceeding as expected, comparing with our projection of 31.3%. We expect inflation in October to decline to 30%, before dropping more aggressively in November to the mid-20s percentage range and ending the year at 21-22% on the back of a strong positive base effect and absence of major supply shocks,” said Reham El Desouki from Arqaam.

“While a December interest rate cut is likely, we believe February 2018 a more likely scenario with a 200 bps cut, following January inflation, and to capture the full effect of the current monetary tightening on liquidity and credit growth,” she added.

Another research note by Capital Economics London said, “Looking ahead, we expect inflation to fall more sharply in the final months of this year. The impact of the 50% drop in the pound against the dollar since it was floated in November 2016 – which pushed up the cost of imported costs – will fade. In addition, the effects of subsidy cuts and tax hikes will also start to fall out of the annual comparison. We expect headline inflation to fall to around 23% y/y by December.”

According to the report, this will pave the way for the Central Bank of Egypt (CBE) to start cutting interest rates.

“We think the first rate cut is likely to come as soon as the MPC’s meeting on 28 December and have penciled in a 100bp cut, taking the overnight deposit rate to 17.75%. If anything, the CBE’s decision earlier this month to raise the reserve requirement ratio from 10% to 14% means that there is a risk that policymakers move even earlier than we expect – the next MPC meeting is on 16 November,” it added.

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