Room for More Egypt Rate Cuts Even as Inflation Accelerates

(Bloomberg) --

Inflation in urban parts of Egypt accelerated for the second consecutive month in December, but at a pace that still gives the central bank ample room to cut borrowing costs again.

The annual rate quickened to 7.1% in December, compared with 3.6% the previous month, the state-run statistics agency, CAPMAS, reported on Thursday. On a month-on-month basis, consumer prices fell 0.2% after a 0.3% drop in November. Food prices fell for a fourth month. Core inflation, the measure used by the central bank that strips out volatile and regulated items, rose to 2.4% in December.

The decline in food prices, which account for around a third of the inflation basket, “confirms the state’s success in containing inflation” by increasing supplies enough to offset seasonal price spikes, said Allen Sandeep, director of research at Naeem Brokerage in Cairo.

“Certainly, this is good news for policy makers,” he said, adding that the current annual rate is near the bottom end of the central bank’s inflation target range of 9%, plus or minus 3 percentage points, by the end of 2020. The central bank’s Monetary Policy Committee is expected to meet next week. The regulator cut rates four times in 2019.

Room for More Egypt Rate Cuts Even as Inflation Accelerates

“At this level, there’s easily room for a 150-basis-points cut,” Sandeep said. “The question is when, not whether, it will happen.”

Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes, said there’s a “good chance” the central bank will enact more cuts next week given that it postponed the meeting in December when policy makers were expected to hold rates.

Curbing inflation that had soared beyond 30% after the Egyptian pound’s 2016 devaluation was crucial for the central bank.

Officials have largely accomplished that, with their efforts earning a thumbs-up from the International Monetary Fund. The IMF had loaned Egypt $12 billion after the currency float, which served as the opening salvo in a sweeping economic program that also included deep subsidy cuts.

©2020 Bloomberg L.P.

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