• Inflation stable at 14% Y-o-Y in July, slower M-o-M Annual headline inflation remained at a seven-year high 14% in July, as accelerated food inflation was balanced, with slowing non-food inflation – the print came in slightly higher than our forecast of 13.6%. Core inflation was also largely stable at 12.3% Y-o-Y. Monthly price trends still show evidence of inflationary pressures as seasonality and continued pass-through of a weaker EGP drive prices higher, as companies gradually pass on cost pressures to consumers. However, the pace of M-o-M changes is slower than earlier in the year at 0.7% in July, down from 0.8% in June and an average of 1.4% in 5M16.
• Setting the stage for another inflationary wave in 2H16 Inflation expectations remain elevated, following the recent sharp weakening of the USD-EGP in the parallel market (down 10.5% in July to EGP12.40) and ahead of the upcoming fiscal and monetary adjustments, which are currently subject to negotiations with the International Monetary Fund (IMF). The government announced this week, the third consecutive annual price hikes for electricity prices with households seeing an average 33% increase in tariffs. The value-added tax (VAT), where discussions of the law in Parliament are progressing, is likely set for implementation in September or October. Finally, floating the EGP is also likely to happen before year-end, we believe. We maintain our forecast of average inflation at 12.5% in FY2016/17 for the time being, with plans to update our estimates once the details and timing of some of the above measures are announced.
• Maintain forecast of 50-100 bps in further tightening in 2H16 In light of the upcoming fiscal and monetary reforms, we continue to expect further tightening in monetary policy in the remainder of the year, especially to help the Central Bank of Egypt (CBE) in its likely attempt to float the currency. The local debt market is clearly preparing for such hikes, with yields remaining on an upward trajectory. The CBE has already increased benchmark rates by 250bps in calendar 2016.

Mohamed Abu Basha