• Weaker EGP and base effects drive inflation jump in April Annual headline consumer price inflation jumped to 10.3% Y-o-Y in April from 9.0% in March, marking the return to double-digit inflation and coming in line with our forecast of 10.2%. The acceleration was driven by a weaker EGP (whether post the 14 March devaluation or the parallel market), as well as unfavourable base effect. Monthly price developments showed sharp food price hikes for the third month in a row, with nearly all components of the food basket registering price increases (including key stables like rice, vegetables, fruits poultry, and dairy products). The numbers provide further evidence to our view that disposable incomes are coming under pressure, resulting in weaker consumption growth.
• Fiscal policy yet again to decide fate of inflation We maintain our average annual inflation forecasts of 9.8% for FY15/16 and 11.5% for FY16/17. Our expectation of acceleration in FY16/17 inflation reflects upcoming fiscal reform measures, including an electricity price hike (third consecutive year), implementation of the value-added tax and potential increase in taxes on tobacco. Indeed, the latest MPC statement noted that the CBE will specifically be following “fiscal policy and its effect on inflation outlook.” Moreover, most consumer goods companies aim to only gradually increase their end product prices, following the recent EGP weakening, meaning the inflationary impact of the devaluation would spread into next fiscal year. We note the new budget is yet to be discussed in Parliament, and therefore the exact timing and magnitude of the VAT is unlikely to be finalised until mid-June.
• Debt yields largely stable in April/May Government debt yields showed muted volatility in the past few months, following a spike after the 17 March 150 basis points policy rate hike. In tandem with the equity market, where activity has been receding as of late, debt markets are waiting for new macro developments to direct future movements - the nearest milestone is the budget. Maintain view of policy rates hikes in 2H2016 Planned fiscal measures and the risk of further EGP weakness means that we are sticking to our view of a further 50-100 bps hike in policy rates in 2H16. The MPC’s next meeting is on 16 June; we expect rates to remain on hold until the VAT is implemented.

Mohamed Abu Basha