Egypt Inflation Edges Up But Leaves Breathing Room for Rates

CAIRO (Capital Markets in Africa) – Egypt’s inflation rate accelerated for the first time in five months, rising 3.6% in November as the effect of last year’s surge in prices faded but offering the central bank little reason to reverse a monetary easing cycle.

The annual rate for urban inflation rose from 3.1% the month before, the state-run statistics bureau said Tuesday. Consumer prices fell 0.3% month-on-month from a 1% rise in October — its lowest since June, according to data compiled by Bloomberg. Core inflation, the gauge used by the central bank and which strips out volatile and regulated items, slowed to 2.1% in November.

Even with the acceleration, inflation was lower than expected and remains within the central bank’s target range of 9%, plus or minus 3 percentage points, by the end of 2020. The central bank has cut rates four times this year, reflecting the confidence that authorities have brought inflation under control.

“Inflation potentially settles at 6%-7% in December, providing room for the CBE to comfortably cut rates in the first quarter of 2020 by 50-100 basis points,” said Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes.

The central bank will probably hold interest rates at its Dec. 26 meeting to wait for potential acceleration in December or January’s CPI figures, he said.

Radwa El-Swaify, head of research at Cairo-based Pharos Holding, sees inflation accelerating to 7% in December, mainly down to the base effect of food prices falling sharply in that month last year.

The easing in the monthly rate was driven by a 4.6% annual drop in food and beverage prices — the largest single component of the inflation basket. On a monthly basis, food fell 1.5%, reflecting efforts by authorities to inject supplies in the market.

Containing cost increases that had soared to over 30% in the wake of the 2016 currency float is key to ensuring social stability in the country of around 100 million people, where about half live on or near the poverty line. It’s also a critical component of the government’s broad economic program that’s now focusing on investing in human capital and boosting the private sector to drive growth.

Extending Egypt’s easing cycle is unlikely to dent investor interest in the country’s debt, given that real interest rates — the difference between the inflation and policy rates — are still around 8.65%.

Along with a 150 basis-point cut in the first quarter of 2020, El-Swaify said she expects another similarly-sized cut in the fourth quarter “which will be another much-needed move to spur investments and reduce debt service.”

Source: Bloomberg Business News