Is this a sustainable decline or merely a result of the fade of the base-year effect?
Some experts answered such questions and discussed the key results of this decline with Ahram Online.
Why is inflation declining?
The main reason for this decline is not an actual drop in prices but a change in the base-year effect used to calculate inflation, Farag Abdullah, an Egyptian Society for Political Economy and Legislation member, explained to Ahram Online.
He said this is a periodic process by the Central Bank of Egypt (CBE) and the Central Agency for Public Mobilization and Statistics (CAPMAS) to ensure data accuracy.
"What happened is more of a modification in the mathematical equation rather than a substantial improvement in prices. If we were calculating inflation using the same criteria as last year, the numbers would be completely different. Therefore, this decline cannot be considered evidence of complete success in controlling inflation," Abdullah stated.
Over the past four months, inflation rates in Egypt have maintained a downward trend. Headline annual inflation calculated by the CAPMAS dropped to 12.8 percent, and the core inflation rate computed by the CBE fell to 10 percent. This is close to the target set by the CBE at seven percent (±two percent).
Can Egypt achieve the 7% target?
Reaching this target is possible but contingent on several factors, most notably the stability of the foreign exchange (FX) rate, controlling fuel prices, and enhancing local production, Bassem Ahmed, the director of individual clients at Naeem Brokerage, told Ahram Online.
In March 2024, the CBE applied the fourth wave of local currency devaluation against other hard currencies, allowing the Egyptian pound to lose over 50 percent of its value against the US dollar.
Additionally, the CBE raised the key interest rates by six percent, bringing the total number of hikes applied since starting the monetary policy tightening cycle in March 2022 to 19 percent (1900 bps).
Egypt also targets completely eliminating fuel subsidies by December 2025 under its commitments with the International Monetary Fund's (IMF) $8 billion Extended Fund Facility (EFF) loan programme.
"The Egyptian government continues its programme to lift subsidies on fuel, which is part of its commitments with the IMF. However, the decline in global oil prices may mitigate the impact of this decision on local inflation, reducing the likelihood of a severe inflationary wave," Ahmed explained.
Is monetary tightening cycle heading towards lower interest rates?
Despite the decline in the inflation rate, Abdullah believes that the CBE will not rush to lower interest rates anytime soon.
He pointed out that three main factors will influence this decision.
First, the repricing of fuel and electricity: any increases may lead to a new inflationary wave.
Second, global monetary policies: Rising inflation in the United States reduces the chances of global interest rate cuts.
Third, increased local spending due to wage hikes may raise demand for goods and push inflation back.
"The CBE will remain very cautious and will not rush to lower interest rates until it is sure that prices are stable and there are no forthcoming inflationary pressures," he added.
Ahmed concurred with this perspective but noted that the CBE may begin gradually reducing interest rates in the second half of 2025, provided inflation rates continue to decline sustainably.
"If inflation rates keep falling without future pressures, there could be a gradual rate cut starting in July 2025, but any move will be carefully calculated," he said.
What if inflation rises again?
Abdullah warns that several variables could pressure prices in the coming months.
These include the reevaluation of fuel prices, which could push inflation back into the range of 15-18 percent, the seasonal impact of high consumption seasons like Ramadan and Eid Al-Fitr, and rising production costs due to global changes in raw material and energy prices.
Following completing the country’s fourth review of the EFF programme this week, the IMF projected inflation to stand at 16.6 percent by the end of FY2024/2025, which ends on 30 June, with an average slightly above 22 percent till the end of this fiscal year.
"Inflation may be under control now, but that does not mean it is over; it could rise again if these factors are not managed," he noted.
Ahmed believes that controlling fuel prices and enhancing local production is the key to keeping inflation rates low.
He emphasized that Egypt needs a comprehensive strategy to ensure dollar availability to cover market needs and prevent exchange rate fluctuations.
Furthermore, it must increase exports to reduce reliance on imported products affected by foreign currency prices and boost local and foreign investment to support economic growth without creating new inflationary pressures.
"Maintaining exchange rate stability and ensuring foreign currency flows from sources like tourism and expat remittances will be essential for inflation stability," he said.
Why might inflation rise in March?
Despite the general decline, this March may witness a slight increase in the inflation rate.
Ahmed attributed this to two main factors: increased demand for goods during the Ramadan season, which led to a temporary rise in prices, and heightened demand for dollars during the import season from China, which could withdraw dollar liquidity from the markets.
March inflation readings are expected to be released on 10 April, a few days before the CBE’s Monetary Policy Committee meeting on 17 April, which will review the key interest rates.
Is a new inflationary wave on the horizon?
According to Ahmed, Egypt is unlikely to experience a strong inflationary wave over the next two or three years as long as the following factors exist:
- Stability of the exchange rate and dollar availability in the markets;
- No significant increases in fuel prices;
- Continuous foreign currency inflows from key sources, such as Suez Canal revenues, which have started to improve after a 60 percent decline due to geopolitical tensions; tourism, which is expected to bring in $16 to $17 billion by the end of 2025; expat remittances, which have returned to rising after a period of decline; and exports, which are seeing high growth rates.
Will monetary policy succeed in controlling inflation?
Abdullah stressed that the CBE plays a crucial role in curbing inflation through liquidity withdrawal operations, managing the exchange rate, and improving foreign currency inflows, which help achieve economic stability.
"The CBE follows a very cautious approach and will only lower interest rates once it is assured that the slowdown in inflation is not just an accounting effect but a reflection of real economic improvement," he concluded.
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