Inflation accelerates on a diminished base effect

Egypt’s annual urban headline inflation accelerated for the second consecutive month, normalising further as the base effects created by 2018’s food supply shock has now fully faded away. Inflation accelerated to 7.1% Y-o-Y in Dec, up from 2.6% in Nov and 3.1% in Oct. The outturn came exactly in line with our expectation and officially marks the normalisation of inflation, following three years of sharp volatility, in our view. Food inflation drove the normalisation in the headline number, rising 1.8% Y-o-Y in Dec, having contracted 4.5% Y-o-Y in Nov, whilst non-food inflation decelerated slightly to 8.4% Y-o-Y. On a monthly basis, inflation was largely subdued, falling 0.2%, driven by a 0.5% M-o-M drop in food prices – reflecting typical seasonal trends – while non-food inflation was flat. 
 
Inflation has now fully normalised; maintain 6-7% forecast range in 2020

We estimate inflation has now fully normalised, forecasting inflation to range between 6-7% over the course of 2020. Our forecast is based on oil prices remaining within the USD60-65/b range and USD-EGP remaining largely stable. As such, the recent uptick in oil prices and any shock to the exchange rate are still the key risks to our inflation outlook. Finally, we reiterate our view that in Egypt’s context, historically, current and forecast inflation rates are depressed, reflecting a weak consumer backdrop, following three years of fiscal and monetary austerity; indeed, the latest numbers showed that real private consumption growth was well-below the country’s population growth rate. 
 
Room for rate cuts at next week’s MPC

We think the amended date of the MPC meeting (now on 16 Jan instead of the earlier date of 26 Dec, with the delay coming as a result of formation of the new CBE board), provided the CBE with the opportunity to confirm the key Dec inflation reading. The latter should have provided a decent insight on the more sustainable inflation rates – after base effects had fully faded away. As mentioned above, these rates are clearly depressed, leaving the CBE with a decent margin on real rates that allows it to cut rates further, in our view. We had predicted earlier stable rates for the Dec meeting, but with the changed date and inflation release, we think there is a larger chance for a rate cut with no substantial reason for the CBE to wait further. We think CBE will be more inclined to use the sizeable real interest rate margin (5.6pp based on corridor, and 4.6pp based on a net-of-tax 12-month T-bill yield) to boost domestic demand, which is growing at historically low rates. We, therefore, see more chance for a 50-100bps of rate cuts on 16 Jan. We still see prospects for up to 200bps of rate cuts in 2020, a magnitude of cuts that allows CBE to ease monetary policy further – together with easing liquidity conditions – whilst also maintaining a stable outlook for the USD-EGP, which is key for preventing inflationary pressures from re-emerging

Mohamed Abu Basha

Mostafa El Bakly