• Seasonality and base effects drive inflation to 7-year high in June Headline inflation jumped to 14.0% in June from 12.3% in May, which was largely in line with our forecast of 13.8%, and thus pointed to continued acceleration in general price levels, driven by a combination of continued pass-through from March’s devaluation, seasonality associated with Ramadan, and base effects. Food inflation accelerated to 17.6% Y-o-Y, while non-food remained largely stable at 10.7%. The fact that monthly headline inflation increased only 0.8%, the slowest pace in four months, points to the strong impact of base effects’ contribution to the elevated headline annual number. Meanwhile, core inflation was largely stable at a seven-year high 12.3% in June as food inflation was driven primarily by fruits and vegetables, which are excluded from the core index.
• Future trends point to continued elevated inflation While inflation might recede post the summer (as seasonality and the base effect fade away), we still expect inflation to remain elevated in FY16/17, which started on 1 July. We, therefore, maintain our 12.5% average inflation forecast for the fiscal year. Prospective fiscal measures, led by the VAT, and the continued pass-on effect from a weaker EGP, are likely to leave inflation above the 12%-mark, in our view. Moreover, last week’s statements by the Central Bank of Egypt (CBE) Governor Tarek Amer hinting towards a move towards a flexible exchange rate regime in the near term are also likely to raise inflation expectations.
• We expect another rate hike in 2016 pending fiscal measures We still foresee another interest rate hike (50-100 bps) in 2H16 to address the inflationary impact from the planned fiscal reforms. However, the VAT is set to be subject to discussions in Parliament this month - following approval of budget last week – with VAT implementation planned for September at the earliest. We, therefore, expect the CBE to leave its policy rates unchanged when it meets on 28 July – the CBE hiked it by 100bps at its previous meeting, in reaction to May’s elevated inflation numbers, bringing total hikes YTD to 250bps.

Mohamed Abu Basha