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Egypt Economics - Headline inflation at ten-month low as base effect kicks in; expect rate cuts in 1Q18

Inflation decelerates to ten-month low of 26% Y-o-Y


The notable slowdown was driven by a deceleration in both food (32.2%, from 39.6% in Oct) and non-food inflation (20.1%, from 22.7% in Oct). Such deceleration officially kicks off a long-awaited period, where a favourable base effect kicks in and leads inflation to decelerate rapidly from its near four-decade highs of +30%. The number came in slightly higher than our forecast of 25.2%, due to some surprising increases in non-food prices.
Monthly trends show a mixed bag


Headline monthly inflation remained largely flat at 1.0% in Nov. Such stability was a mix between a 0.5% M-o-M fall in food prices – the first in two years – and a 2.5% M-o-M increase in food prices, which continued to accelerate for the fourth consecutive month. The decline in food prices was driven mostly by a seasonal decline in vegetable prices, with some staples (including daily products) continuing to record price increases. The recent adjustment in administered tobacco prices was not the only driver of non-food inflation, as a few other items also recorded sharp price jumps (clothing and footwear up 11.6%; miscellaneous goods and services 11.0%; and furnishing and household equipment 2.1%). 
Rate cuts on the way; likely to kick in 1Q18


We expect inflation to continue to decelerate sharply over the coming few months, reaching 22-23% in Dec, 17-18% in Jan and 14-15% by mid-2018, thanks to a sizeable base effect. Such slowdown will allow the Central Bank of Egypt (CBE) to commence an easing cycle, while maintaining a margin of positive real interest rates, in our view; note that the corridor rate now stands at 18.75%. While we see chances for a rate cut at the MPC’s next meeting on 28 Dec, we expect CBE to only start cutting rates in 1Q18 in order to ensure the extent of the expected slowdown is, indeed, in line with CBE’s expectations. This is especially the case, given two recent developments which resemble potential upside risks to inflation, namely i) continued acceleration in GDP growth in 1Q17/18, along with recent readings showing the private sector starting to recover; and ii) rise in oil prices. 

Mohamed Abu Basha