Egypt’s annual headline consumer price inflation decelerated to 10.1% Y-o-Y in January from 11.1% Y-o-Y in December, according to data released by CAPMAS. The deceleration was driven largely by softening annual volatile vegetable prices, coming slightly below our forecast of 10.5%. Despite the easing figures, we monitored a number of monthly price changes in a number of food and non-food items indicating inflationary pressures are not fading away.   Seasonal items drive annual deceleration, but monthly trends show pressures not abating: All inflation gauges (food, non-food and headline) showed annual deceleration, thanks largely to seasonal and base effects. Vegetable prices, which lifted inflation in 2H2015, eased for the third consecutive month largely on better weather conditions. On a monthly basis, food prices dropped 0.1% M-o-M, thanks to the 4.9% decline in vegetable prices, which overshadowed notable increases – ranging between 0.6% to 2.6% – in various food items including meat, fish, cereals, oils and fruits. Non-food inflation was up 0.3% M-o-M, with the category of household equipment showing its fourth consecutive monthly increase.   Inflationary pressures clearly on the upside: We expect inflation to remain elevated and see upside risks to our 2016 average 9.0% headline inflation forecast. These pressures stem mainly from fiscal and monetary policies: Efforts to rationalise imports, whether through more stringent banking rules from the Central Bank or higher import tariffs on various consumer goods, are likely to result in generally higher inflation expectations. An additional factor on our watch list is the prospective value-added tax (VAT), with the Prime Minister saying on Tuesday that the law would be presented next week to Parliament – it is likely to be implemented later in the year. Finally, further weakening of the USD-EGP remains a key risk for the inflation outlook.   Maintain view of 50 bps policy rate hike in 2016: In light of the above-mentioned upside inflationary pressures, we maintain our view of a 50 basis point hike in policy rates in 2016. Depending on the timing of VAT implementation and magnitude of a potential devaluation, we could even see a larger hike in policy rates. For now, we expect the CBE to maintain policy rates unchanged at its next meeting on 17 March. (CAPMAS, Mohamed Abu Basha)