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10-Jan-2018

Egypt Economics - Inflation slows down to year-low in Dec; maintain our view of rate cuts commencing Feb

Inflation decelerates to 21.9% in Dec; exactly in line 

Annual inflation slowed down to 21.9% from 26% in Nov and 30.8% in Oct and was driven by both food (25.2% vs. 32.3% in Nov) and non-food items (18.7% vs. 20.1% in Nov). Monthly inflation trends were positive, recording inflation’s first M-o-M drop in two years, driven by a 0.2% M-o-M decline in food prices (for the second consecutive month). This positive trend came as a number of staples – including red meat, poultry, vegetables and lentil – recorded price declines. Non-food inflation was flat M-o-M, with nearly all non-food components of CPI showing no price movements. 
 
December numbers confirm pace of inflation deceleration

December’s outturn, coming exactly in line with our expectations, confirm our projections for the trend of deceleration in inflation as the one-off inflation shock of 2017 quickly fades away. While the drop in food prices in Dec is partially seasonal, it does show that price trends are normalising. We expect inflation to slow down further to 17-18% in Jan and 15-16% in Feb as the base effect accelerates before stabilising at 13-14% by mid-2018. Inflation trends in Jan, a typical month where prices for the new year are set, will confirm further the pace of inflation deceleration.
 
Stick to forecast of rate cuts kicking off in February

The expected further deceleration in inflation over the next couple of months will provide, in our view, room for the Central Bank of Egypt (CBE) to kick-start its monetary easing cycle, while maintaining a necessary margin for positive real rates. As such, we stick to our view that CBE is likely to cut rates at its next meeting on 15 Feb. CBE will have inflation readings of Jan ahead of the meeting, providing good evidence of inflation trends in 1H18, in our view. We expect rate cuts of 300-400bps in 2018. The key downside risk to inflation outlook is oil price, which will dictate partially the extent of the upcoming fuel subsidy cut expected in early 2H18.

Mohamed Abu Basha