• Electricity price hike drives inflation spike; CPI up 1.9% in August Annual headline consumer price inflation continued to accelerate in August, jumping close to an eight-year high of 15.4% from 14.0% in July. On a monthly basis, inflation jumped 1.9% M-o-M vs. 0.7% in July, led by the third annual electricity price hike (up 34% M-o-M), as well as by further pass-through of the EGP’s sharp depreciation in the parallel market - as most sectors into the economy migrate to pricing levels closer to the EGP’s parallel rate (currently at EGP12.50/70). Core inflation also accelerated, to 13.3% Y-o-Y from 12.3% in July. The core measure was up 0.6% M-o-M compared to an increase of 0.2% in July, mainly reflecting higher food, house appliances and auto prices.
• More price pressure ahead, driven by VAT, tobacco and EGP Inflation is set to continue accelerating, in our view, as inflationary pressures reach their peak in the coming few months due to a number of factors, led by the continued pass-through of weaker EGP (including a likely float before end of year as part of the IMF deal), approval of tobacco price hikes in September, and the planned implementation of the Value-Added Tax (VAT) [we forecast a 2pp inflationary impact of the new tax]. VAT legislation has been approved recently by Parliament, and the tax is set for implementation by October. We maintain our average inflation forecast of 14.3% in FY16/17, expecting inflation to peak close to 18% after the EGP float. Risks to our forecasts are titled mainly to the upside, as a number of inflationary factors will be moving in parallel and will likely intensify over the coming few months.
• Elevated inflation casts shadow on domestic demand growth The highest inflation numbers since 2008 clearly point to the pressures facing the consumer, as the economy undergoes monetary and fiscal adjustments. With inflationary pressures set to intensify, we stick to our recently-updated forecasts of the economy likely witnessing the second weakest year of real domestic demand growth in the past decade, set for 3.3% Y-o-Y in FY16/17.
• Policy rate hike likely to come post VAT implementation We still expect further policy rate hikes of around 100bps in 2016, given the above-mentioned inflationary pressures (the CBE has already hiked by 250bps in 2016). We see the next hike coming post implementation of VAT: we, therefore, expect the CBE to hold fire on 22 September, followed by a likely rate hike in the following meeting on 17 November.

Mohamed Abu Basha