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11-Mar-2018

Egypt Economics - Second rate cut on the cards as inflation hits post-devaluation low in February

Inflation hits post-devaluation low of 14.4% in February

Egypt’s headline inflation continues to moderate, falling to 14.4% in February from 17.1% in January, according to data released on Thursday by CAPMAS. Moreover, core inflation slowed to 11.9% from 14.4% in January, close to a two-year low. Inflation hit the lowest rate since devaluation (November 2016) and was lower than our expected 15.1%, beating our forecast for the third month in a row. Monthly price trends were largely positive, though it saw some minor acceleration compared to the previous three months; headline inflation stood at 0.3% M-o-M, the highest since November, largely driven by a 0.8% M-o-M increase in food prices as non-food inflation contracted by 0.3% M-o-M. Core inflation was up by 0.4% M-o-M.
 
Further deceleration expected until June

We maintain our forecast of inflation slowing to 13-14% towards mid-2018 with risks predominantly tilted to lower inflation numbers. Monthly inflation over the past few months clearly indicates the absence of major inflationary pressures as prices stabilise post the first and second round of structural reforms. In parallel, the government is not planning to introduce any fiscal measures for the remainder of FY17/18, which ends on 20 June 2018. Inflation is likely to stabilise around the 13% mark in 2H18 when the planned energy subsidy cuts take place.
 
Another 50-100bps cut in this month’s MPC

The absence of inflationary pressures and the even wider margin on positive real interest rates (Fig 4) will drive the Central Bank of Egypt (CBE), in our view, to push for a second rate cut when the Monetary Policy Committee meets later this month. We maintain our view of another 50-100bps of rate cuts before the CBE takes a pause to assess the impact of its two rounds of monetary easing on key monetary aggregates. Additional visibility on the next round of energy subsidy cuts, to be decided in the next IMF review likely to take place in April, largely in light of the recent increase in global oil prices should also provide more guidance on short-term movement in policy rates.
 
Yields to drift lower

Government debt yields are likely to reverse their rising trend of the past few weeks, drifting lower as they price in an expected policy rate cut later this month. Yields rebounded post the rate cut in February as the market priced a larger cut. We expect such volatility to continue over the coming few months as the market builds more consensus on the short to medium-term trajectory of future of policy rates.

Mohamed Abu Basha