Lowest Egypt Inflation in Almost 2 Years Renews Rate Cut Debate

(Bloomberg) -- Inflation in Egypt eased to its lowest level since May 2016, spurring speculation that the central bank may extend its cycle of interest-rate cuts in the coming months.

The annual rate in March in urban parts of Egypt dropped to 13.3 percent from 14.4 percent in February, according to data from the state-run statistics agency. The figure is squarely within the target range of 13 percent, plus or minus 3 percentage points, that the central bank set after the November 2016 decision to lift currency controls. Core inflation eased to 11.59 percent, according to the central bank, the lowest it’s been in two years.

Both trends are supporting the central bank’s decision to lower interest rates by 100 basis points at its last meeting in March, its second cut in a row. But economists differed on the timing of further reductions.

London-based Capital Economics said the regulator could enact another 100-basis-point cut at its rate meeting mid-May and then hold off in June while awaiting details of planned subsidy cuts.

What’s clear is that “a substantial and prolonged easing cycle is still likely, and we expect the overnight deposit rate to end this year at 13.75 percent, whereas the consensus expects it to fall to 14.25 percent,” it said in a research report.

Monthly Rise

Other economists considered a reduction in the benchmark rate next month unlikely. The central bank has been gradually rolling back the 700 basis points in increases it engineered following the currency float.

The data released on Tuesday showed prices in urban areas rose 1 percent month-on-month, the third straight acceleration in the rate. That’s largely due to seasonal factors such as demand over Easter and the holy fasting month of Ramadan, said Cairo-based economist Reham El Desoki.

As part of the sweeping economic measures adopted to help secure a $12 billion International Monetary Fund loan, the government is expected to cut energy subsidies further and implement other cost-cutting measures.

The subsidy cuts are unlikely to affect inflation much, particularly as consumer demand is still recovering, El Desoki said.

To contact the reporter on this story: Tarek El-Tablawy in Cairo at teltablawy@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams, Andrew Atkinson

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