Food prices drive an elevated inflation reading
Egypt’s annual headline urban inflation in May accelerated to 14.1%, from 13.0% in April, driven primarily by higher food inflation (15% vs. 13% in April) as non-food inflation was largely flat at 13.1%. While the outturn came below our forecast of 15%, it confirmed our view that inflation was set for a temporary acceleration in May due to a lower base last year and, therefore, does not reflect any change in inflation trends. Indeed, monthly inflation recorded one of its lowest increases in the past few years, considering the Ramadan seasonality. Headline inflation was up 1.1% M-o-M, with food prices rising 1.5% – driven by a 14.3% jump in fruit prices and 9.7% in poultry – and non-food 0.7% in a relatively subdued inflation reading. Meanwhile, core inflation (which excludes the prices of fruit, vegetables and regulated items) slowed to 7.8% Y-o-Y in May, from 8.1% in April, clearly highlighting the stable inflation environment.
We maintain our view on inflation
May’s inflation numbers confirm our projected inflation path, namely a slightly elevated reading before starting a disinflation trend, driven primarily by a favourable base effect. We continue to forecast a slower inflation reading in June onwards, even if the fuel liberalisation is implemented in June (and considering the recently announced increase in electricity tariffs), with possibly one or two single-digit inflation readings during 2H19. This year’s fuel price hike is likely to be half or less than the 40% average increase of last year – thanks to the c7% YTD appreciation of the USD-EGP, as well as the recent correction in oil prices – thereby providing the inflation trajectory with a favourable base and setting a disinflation path, when inflation is set to normalise to 10-11% by end-2019.
Rates likely to be on hold until 3Q19
With fuel price liberalisation just around the corner, we continue to expect the Central Bank of Egypt (CBE) to keep policy rates on hold, at least during its next meeting on 11 July, to investigate the pass-through effect on inflation. Given our projected inflation path detailed above, we stick to our view that policy rates are set for a 100-200bps of rate cuts in 2H19, starting with September at the earliest. We foresee another 200-300bps of rate cuts in 2020 as inflation normalises further.
Mohamed Abu Basha
Mostafa El Bakly