Positive inflation reading in August supports a cut in rates this month

CARIO (Capital Markets in Africa) – Positive inflation reading in August, below expectations, despite seasonality Annual headline inflation saw a deceleration to 7.5% in August, well below both our estimate of 8.4% and July’s reading of 8.7%, on the back of a monthly rise of 0.7% vs our estimates of a rise of 1.5% and July’s monthly rise of 1.8%. August’s reading marks the lowest inflation reading in six years, which was aided by the favorable base effect, EGP strength, and a more cautious spending behavior that impacted the monthly change, despite seasonality accompanying the Adha Feast and summer vacation. Moreover, this reading confirms our view that the single-digit inflation low registered in June, despite its temporary nature, provided adequate cushion for inflationary pressures and will continue to have a substantial impact on inflation readings throughout 2H19. The deceleration was driven by a softer rise in food prices by 6.9%, down from 9% in July, which was supported by a monthly increase of 1% in food prices, vs 0.8% a month earlier, that came to reflect the seasonal demand during the month. Meanwhile, healthcare is the only segment that saw a rise both y-o-y and m-o-m of c2%.

Higher chances of a 50-100bps cut in interest rates in September 26 meeting We reiterate our view that muted inflationary pressures coupled with the solid macro stance will allow for continued easing cycle this time. A favorable base effect and EGP strength will continue to advocate benign annual inflation readings till year-end, keeping inflation rates within the CBE’s target zone of 9% (+/-3%) by end of 2020, particularly barring any expected price shocks. We note that domestic fuel prices will be subject to a review by end of September 2019, where we believe prices will remain unchanged on the back of the strength in the EGP coupled with the currently low oil prices, below the budgeted figure of USD67/b. Hereby, we foresee a 50-100bps cut in interest rates in the next MPC meeting on September 26, 2019. We expect 300bps cut in 2020. Other key factors on our watch list to confirm our view along the road include: i) foreign inflow in the fixed income after the impact of the cut on yields; ii) performance of banks’ and CBE NFAs; and iii) stability of the pound within our expected range of EGP16-17/USD.

Regarding the other key element for the interest rates decision, we believe treasury yields will remain attractive, even after mirroring the interest rate cut, underpinned by a strong EGP and rising real interest rates given the inflation deceleration. We note that among the emerging markets with comparable yields, Egypt still stands out with its improved macro indicators and +5% GDP growth.

Alia Mamdouh
Director | Macro and Strategy
Tel: +2 (02) 24616407
amamdouh@beltonefinancial.com

Rawan Ali
Analyst | Macro
Tel: +2 (02) 24616411
rali@beltonefinancial.com