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Thursday, 23 January 2020

Inflation declines again

Sherine Abdel-Razek , Wednesday 18 Sep 2019
Inflation declines again
Inflation declines again
Views: 483
Views: 483






As inflation rates cooled to their lowest levels in six years in August, the possibility of yet another reduction in interest rates is high, writes Sherine Abdel-Razek.

Annual headline inflation in Egypt saw a decline to 7.5 per cent in August, compared to 8.7 per cent a month earlier and marking the lowest inflation reading in six years. The rate is now below the mid-point of the Central Bank of Egypt’s (CBE) target range of nine per cent plus or minus three per cent for the end of 2020.

August’s reading was aided by the strength of the pound and more cautious spending behaviour that impacted spending throughout the month despite seasonality accompanying the Al-Adha holiday and summer vacation, according to the financial firm Beltone Financial.

The decline also came as a result of a softer increase in food prices by 6.9 per cent as compared to nine per cent in July, this driven by lower than usual vegetable prices growth and negative growth in the prices of meat and poultry.

Beltone ruled out any price shocks until the end of 2019 even in the light of the expected review of domestic fuel prices by the end of September, saying that “prices will remain unchanged on the back of the strength in the pound coupled with the currently low oil prices that are below the budgeted figure of $67 per barrel.”

Pharos Securities agreed, saying that the high inflation rates in September, October and November 2018 would create room for smaller growth over the coming months in what is known as a “favourable base effect.”

“We see inflation persisting in the single digits for the rest of 2019, ending the year with an average of 9.1 per cent year-on-year and ending 2019-20 with an average of 9.2 per cent,” Pharos said in a research note. 

The continuing decline makes an interest rate cut in the September meeting of the CBE more likely. Beltone expects a 0.5-one per cent decrease during the meeting, and Pharos expects a one-1.5 per cent decrease. In August, the CBE surprised the markets by a reduction of 1.5 per cent in its overnight interest rates to reach 15.25 and 14.25 for lending and deposits, respectively.

Capital Economics, a research firm based in London, noted that if expectations of further drops in inflation materialise even more easing lies in store. “By the end of 2021, we forecast the overnight deposit rate to fall to 9.75 per cent, the first time it will have been in single digits since early 2016,” it said.

While some fear that further reductions in interest rates will make investments in local treasuries unattractive, Beltone noted that treasury yields remained attractive even after mirroring the interest rate cut when underpinned by a strong pound and rising real interest rates given the inflation reductions.

“Among the emerging markets with comparable yields, Egypt still stands out with its improved macro indicators and five per cent GDP growth,” Beltone said.


 *A version of this article appears in print in the 19 September, 2019 edition of Al-Ahram Weekly.

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