Egypt headline inflation falls to a surprising 9.4%

Egypt’s annual urban consumer price inflation plunged to 9.4% in June from 14.1% in May, official statistics agency CAPMAS said on Wednesday, a significantly bigger drop than analysts had expected and its lowest since March 2016.

Analysts said the deceleration was partly caused by last year’s high base effect and by lower vegetable prices, which are often a key contributor to high inflation.

“That’s a bigger-than-expected drop,” said Allen Sandeep, head of research at Naeem Brokerage. “Good news for the markets, as this could raise hopes for a rate cut tomorrow.”

The monetary policy committee of the Central Bank of Egypt (CBE) will meet on Thursday. It held rates steady at its last two meetings, in May and March, after a surprise cut in February.

Of 15 contributors to a poll, Naeem was the only one to predict a cut on Thursday.

The bank’s overnight deposit rate is 15.75% and the overnight lending rate 16.75%.

“I don’t think the CBE will rush into cuts as it predates the rollout of fuel subsidy cuts,” said Maya Senussi, senior economist for the Middle East at Oxford Economics.

Urban inflation fell month-on-month in June by 0.8% after rising by 1.1% in May, the statistics showed. The year-on-year figure was the first single-digit inflation since March 2016, when it was at 9%.

“It’s due, in part, to last year’s high rates and also to some falling vegetable prices,” said Angus Blair, chairman of business and economic forecasting think-tank Signet.

Vegetable prices, which have a 6.9% weighting in the basket of goods, rose 17.6% year-on-year in June, but fell 10% compared to May, CAPMAS said. Vegetable prices rose 35.8% month-on-month in May.

Egypt raised fuel prices last week by 16% to 30% as part of an economic reform programme backed by the International Monetary Fund that saw inflation rise to a high of 33% in 2017.

Analysts said inflation in July and August was likely to return to double digits, especially as the effects of the fuel price hikes are felt.

While economists had predicted a softer deceleration in inflation in June, most continued to predict the bank would hold rates until the fuel price impact is tested.

Last week’s fuel price increases were the latest subsidy cuts tied to the IMF loan that have financially strained Egyptians, millions of whom live under the poverty line.

Other reforms under the deal included devaluing the Egyptian pound by half and introducing a value-added tax.

“The central bank will wait for the second-round effects of the subsidy cuts and for the spillover from higher wages and pensions to materialise,” said Dina Rofael, senior economist at Sigma Capital.

She predicted the bank would cut rates by 100 to 200 basis points in the fourth quarter of this year or early 2020.

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