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Analysis: Inflation at new lows

The positive inflation in October increases the possibility of another cut in interest rates, reports Safeya Mounir

Safeya Mounir , Wednesday 13 Nov 2019
Inflation at new lows
source: Pharos
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Egypt’s annual inflation hit its lowest rate in nine years, recording 2.4 per cent in October from 4.3 per cent in September, the Central Agency for Public Mobilisation and Statistics (CAPMAS) has reported.

The country’s inflation rates have been decreasing for the past five months. The food and drinks sector has been a leading cause, after a 2.1 per cent decline in prices, according to CAPMAS, with vegetable prices plummeting by 17.2 per cent.

Fresh meat prices decreased by 7.3 per cent and poultry prices by 16.4 per cent, resulting in an overall drop in poultry and meat sector prices of 10.5 per cent.

Radwa Al-Sweify, head of research at Pharos, an investment bank, said that it had “anticipated annual headline inflation to record 3.5 per cent, paving the way for a drop of one per cent in the banks’ interest rates on 14 November.”

For monthly inflation, October’s reading came in at one per cent, up from 0.3 per cent in September, due to an increase in education costs by 28.9 per cent, according to CAPMAS figures. Monthly inflation had recorded decreased rates in August and September.

Pre-school and primary stage education costs rose by 29.5 per cent, while secondary and technical school costs increased by 28.9 per cent. Higher education costs skyrocketed by 28 per cent.

“The majority of schools increase their fees every year. With the school year beginning in September, the effect of school expenses appears on household spending and inflation rates in October,” Al-Sweify told Al-Ahram Weekly.

The retreat in annual inflation was the result of comparing this year’s rate to that in October 2018, which was much higher. The state had increased the supply of basic commodities to cover demand and prevent price increases, Al-Sweify said, adding that the shortage of certain commodities in the market last year, such as potatoes and lemons, had resulted in an increase in inflation rates.

Al-Sweify said that the headline annual inflation recorded in October will be the least this year, and she expects the inflation rates to gradually increase to three or four per cent, since those in November and December 2018 had recorded lower rates. 

Despite the decrease in the prices of some commodities, the general cost of living is still high, she said.

Many people have observed drops in food prices, including Sarah, a woman in her 20s who lives between Cairo and Assiut. “Meat prices have dropped in my hometown from LE140 to LE120 or LE130 per kg. In some villages 1.5 kg of meat can be sold for LE100,” she said.

University student Mona who lives in Sheikh Zayed City said “the price of a kg of apples has fallen from LE27 to LE21, and bananas and grapes have dropped by LE2 or LE3 per kg.” Massoud Ahmed, in his 30s and living in Qalioubiya, said the price of a litre of milk had increased from LE11 to LE13, while meat prices had dropped from LE100 to LE70.

Annual headline inflation rates decreased in March and April, rose in May, then plummeted from June through September despite the hike in fuel and electricity prices in July.

Annual inflation recorded rates unprecedented in decades throughout 2017 as a result of the economic reform programme the government has launched in recent years, including the floatation of the pound in late 2016 and the raising of the prices of energy products.

Inflation hit the 33 per cent mark in July 2017, the highest in three decades.

Annual inflation rates decreased from November 2017 to May 2018, before hiking once more in June 2018 with an increase in fuel prices.

The Central Bank of Egypt (CBE) targets to stabilise annual inflation at nine per cent, plus or minus three per cent, in the fourth quarter of 2020.

The decrease in inflation rates increases the chances that the CBE’s Monetary Policy Committee will decrease interest rates during its meeting today. Pharos and investment bank HC Securities expect interest rates to drop by 0.5 to 1.5 per cent.

Monette Doss, a banking analyst with HC Securities, expects the CBE to lower interest rates by 0.5 per cent on the back of the drop in inflation rates, while Al-Sweify anticipates interest rates decreasing by one or 1.5 per cent as a result of the drop in US interest rates by 0.25 per cent.

The CBE decreased interest rates by 1.5 per cent in August and by one per cent in September. The overnight deposit rate, the overnight lending rate, and the main operations rate were cut to 13.25 per cent, 14.25 per cent, and 13.75 per cent, respectively.

With these cuts, the CBE has been bringing interest rates to figures similar to those prior to the floatation of the pound in November 2016, after it had increased them by seven per cent from November 2016 to July 2017.

Increased interest rates encourage foreign investors to invest in Egyptian debt instruments, since higher interest rates lead to higher profits. But the increased interest rates are a burden to the state budget, eating away at debt-servicing allocations.

The US investment service Bloomberg noted that the effects of the decrease in interest rates on the interests of investors in domestic debt were clear. Investors regarded Egypt as a favourite investment destination because its interest rates were higher than in other emerging markets, it said.

Investment bank EFG Hermes expects the exit of between LE3 and LE5 billion from Egyptian debt investments during 2020 as a result of the decrease in interest rates.

But it added that the CBE and Egyptian banks have strong liquidity that can handle the exit of these amounts. There may also be a slight depreciation in the pound in 2020 to an average of LE16.25 per dollar from LE16.1 per dollar by the end of this year, it said.

 

*A version of this article appears in print in the 14 November, 2019 edition of Al-Ahram Weekly.

 

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