11-Jan-2017
Egypt Economics: M-o-M inflation slower in December; annual headline at new six-year high; we still assume CBE rates will be stable in 1H17
Food inflation continues, while non-food pressures recede
Egypt’s headline inflation reached a new six-year high of 23.3% Y-o-Y in December, the second month post floating the currency (early November), accelerating from 19.4% in November and 13.6% in October. Core inflation also accelerated to 25.9% Y-o-Y from 20.7% Y-o-Y in November, mostly on higher food prices. On a monthly basis, however, the pace of inflation eased to 3.1% M-o-M vs. 4.9% M-o-M in November, with the deceleration driven mostly by lower inflation in non-food items (1.1% M-o-M vs. 4.7% in the previous month when the first round effect of the price increases drove such high inflation levels). Food inflation actually accelerated to 5.3% M-o-M in December from 5.0% M-o-M in November.
Further inflationary pressures yet to materialise
We expect further pass-through from floating the EGP to result in higher inflation in the coming few months. These will be led by the upcoming adjustment of pharmaceutical prices, as well as the continued gradual pass-through of the weaker EGP by consumer companies. Further subsidy cuts are also on the cards, though the timing of these remains unclear. We maintain our forecast of inflation averaging 19.8% Y-o-Y in FY2016/17 (having averaged 16.6% in the first half of the year). We note that our forecasts do not include further fuel price hikes, as the timing and magnitude of these remain unknown.
Maintain outlook for stable rates in 1H17, cuts in 2H17
Having preemptively increased interest rates by 300bps post floating the currency as the Central Bank of Egypt foresaw the rise in inflation (with cumulative rate hikes in past 12 months standing at 600bps), we continue to expect interest rates to remain on hold in 1H17. We think the CBE will see a positive trend through the easing of the pace of monthly inflation, though it is too early to hint that this is sustainable. The key risk to the inflation outlook, and in turn, the interest rate outlook, remains the future path of the USD-EGP, which remains close to its all-time lows. If the USD-EGP remains at current levels, this is likely to result in an upward shift in inflation expectations and would represent a risk to our interest rate outlook.
Mohamed Abu Basha
Egypt’s headline inflation reached a new six-year high of 23.3% Y-o-Y in December, the second month post floating the currency (early November), accelerating from 19.4% in November and 13.6% in October. Core inflation also accelerated to 25.9% Y-o-Y from 20.7% Y-o-Y in November, mostly on higher food prices. On a monthly basis, however, the pace of inflation eased to 3.1% M-o-M vs. 4.9% M-o-M in November, with the deceleration driven mostly by lower inflation in non-food items (1.1% M-o-M vs. 4.7% in the previous month when the first round effect of the price increases drove such high inflation levels). Food inflation actually accelerated to 5.3% M-o-M in December from 5.0% M-o-M in November.
Further inflationary pressures yet to materialise
We expect further pass-through from floating the EGP to result in higher inflation in the coming few months. These will be led by the upcoming adjustment of pharmaceutical prices, as well as the continued gradual pass-through of the weaker EGP by consumer companies. Further subsidy cuts are also on the cards, though the timing of these remains unclear. We maintain our forecast of inflation averaging 19.8% Y-o-Y in FY2016/17 (having averaged 16.6% in the first half of the year). We note that our forecasts do not include further fuel price hikes, as the timing and magnitude of these remain unknown.
Maintain outlook for stable rates in 1H17, cuts in 2H17
Having preemptively increased interest rates by 300bps post floating the currency as the Central Bank of Egypt foresaw the rise in inflation (with cumulative rate hikes in past 12 months standing at 600bps), we continue to expect interest rates to remain on hold in 1H17. We think the CBE will see a positive trend through the easing of the pace of monthly inflation, though it is too early to hint that this is sustainable. The key risk to the inflation outlook, and in turn, the interest rate outlook, remains the future path of the USD-EGP, which remains close to its all-time lows. If the USD-EGP remains at current levels, this is likely to result in an upward shift in inflation expectations and would represent a risk to our interest rate outlook.
Mohamed Abu Basha