Egypt Inflation at Nine-Year Low Gives Scope for More Rate Cuts

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Egypt’s inflation rate slowed to its lowest level in over nine years, offering fresh ammunition for the central bank to move ahead with another rate cut when it meets next week.

Consumer prices in urban parts of the country rose by 3.1% in October compared to 4.8% in September, according to the state statistics agency, CAPMAS. The rate was the lowest since September 2010, according to data compiled by Bloomberg.

The month-on-month rate accelerated to 1% compared to September. The decline reflected the high base effect from last year as well as a sharp easing in food and beverage prices, which constitute the largest component of the consumer price index.

With the latest slowdown in inflation, the “real interest rate is almost 10% -- one of the highest globally,” said Allen Sandeep, director of research at Naaem Holding in Cairo. That could give the regulator room for a measured rate cut on Nov. 14, but it “remains to be seen if the CBE eases interest rates aggressively as, in our view, the high base factor impacts should last just a few more months.”

Six of seven economists surveyed by Bloomberg before the inflation announcement predicted a cut of 100 basis points at next week’s meeting. The benchmark rate is currently 13.25%.

The easing in the annual inflation rate puts it well within the central bank’s target range of 9%, plus or minus 3 percentage points, by the fourth quarter of 2020. The regulator has cut interest rates by 2.5 percentage points since August.

The slowdown in the rate of annual inflation is one of the central bank’s biggest accomplishments since Egypt embarked on a sweeping IMF-backed economic program in 2016. After the regulator devalued the currency, inflation spiked to over 30%, crimping business activity and increasing the burden on a population of 100 million where around half live near or below the poverty line.

Further rate cuts may help stimulate business activity that’s been relatively muted. But the central bank must also weigh the possible impact of any rate cut on investors in local debt who’ve seen Egypt as an emerging market darling offering some of the best rates on return.

Cairo-based investment bank CI Capital expects inflation to average 7.55% in the 2019-20 fiscal year and 9.55% in the following one. “We continue to see that such low inflation figures should not be the main factor behind interest rate decisions moving forward, and that the CBE needs to slow down the pace of cuts,” economist Noaman Khalid said in emailed comments.

Khalid expects the central bank to hold rates in the next two meetings, “as it needs to assess the impact and sensitivity of the recent rate cuts on overall activity” in order to not exhaust its liquidity instruments and ensure Egypt remains a favorite for the emerging-market carry trade.

Conversely, a continued decline in food prices might mean that “Egypt’s inflation reading could continue at a wafer-thin single digit rate for the near term,” Naeem wrote in a report last week.

“The dramatic drop in inflation, in our view, could pose as a short-term challenge for policy makers going forward, both from a fiscal as well as monetary policy angle,” it said.

--With assistance from Michael Gunn.

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, Michael Gunn, Jacqueline Mackenzie

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