Rate Cut on the Horizon as Egypt's Inflation Hits Four-Year Low

(Bloomberg) -- Egypt’s annual inflation hit its lowest rate in four years, bucking expectations that cuts in fuel subsidies would spur an acceleration and raising the chances of the central bank joining a global easing cycle.

Consumer prices in urban parts of Egypt increased by 8.7% in July, compared to 9.4% the month before, the state-run statistics agency CAPMAS said Thursday. That may give the central bank breathing space to make its first rate cut in six months when it meets Aug. 22. The benchmark rate is currently 15.75%, helping power the world’s best carry trade for foreign investors.

“The way things stand right now, I see there’s enough room to cut rates by 300 basis points over the course of a few months,” said Allen Sandeep, director of research at Cairo-based Naeem Holdings. Real interest rates of about 7.5% are about three to four percentage points higher than most emerging markets right now, he said.

The month-on-month inflation rate accelerated to 1.8%, from a 0.8% contraction in June, but well below analyst projections of slightly over 3%. Core inflation, the gauge measured by the central bank and that strips out regulated and volatile items, slowed to 5.9% in July, with the month-on-month rate at 0.11%.

The headline inflation figure -- the lowest since August 2015, according to data compiled by Bloomberg -- offers some welcome news as the country wraps up a three-year economic reform program backed by the International Monetary Fund. Fuel-subsidy cuts that went into effect at the start of the fiscal year in July had led many to predict a temporary uptick.

Sandeep said food prices hadn’t risen as much as expected, while consumer demand was muted.

“The government has been largely successful in terms of bulking up inventory to confront the expected impact,” he said, predicting the subsidy cuts probably wouldn’t spill over into August’s inflation figures.

Sweeping Reforms

The Arab world’s most populous nation has been on a mission to bring inflation under control after its late-2016 decision to float the currency and implement sweeping reforms, including cutting costly energy subsidies, to curb the budget deficit.

The central bank had set an inflation target of 9% by the end of 2020, plus or minus 3 percentage points, and the current readings fall well into that.

A favorable base effect, along with the appreciation of the pound against the dollar this year, “will continue to advocate benign annual inflation reading till year-end” that’s within the target range, Cairo-based investment bank Beltone Financial said in a research note. It said it expects a 100 basis point cut in the benchmark rate this month.

The macroeconomic gains have contrasted sharply with other key figures that spotlight the challenges Egyptians have faced since the economic program was launched.

Figures released in late July showed about 32.5% of Egypt’s population living in poverty in 2018, up from 27.8% in 2015 and almost double the rate at the start of the millennium.

The easing in inflation “increases the chances of a rate cut” this month, but the central bank might be cautious and wait for August figures before acting, said Mohamed Abu Basha, director of macroeconomic analysis at Cairo-based investment bank EFG Hermes.

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, Amy Teibel, Michael Gunn

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