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Lower inflation
Published in Al-Ahram Weekly on 18 - 01 - 2018

For the first time in almost two years, Egypt's monthly inflation rate declined by 0.2 per cent in December compared to its level in November, according to the Central Agency for Public Mobilisation and Statistics (CAPMAS). The rate is the lowest since November 2015.
Meanwhile, annual inflation followed its four-month downward trend to reach 21.9 per cent, compared to 26 per cent in November. The decline comes on the back of a retreat in the rate of increase in the prices of food staples, representing 40 per cent of the components of the commodities and services basket according to which inflation is calculated. Annual food and beverage prices rose by 25.2 per cent in December compared to 32.3 per cent the previous month, including red meat, poultry and vegetables.
Investment firm Pharos Securities said “the decline in the staples' inflation rate could be attributed to discounts on food items in tandem with the end-of-year holiday season in December.” Finance Minister Amr Al-Garhi said the drop was “a better than good indication and puts us on a good path” in comments made to Reuters. He expected the rate to fall below 20 per cent next month and to 10 to 12 per cent in 2018, before declining to 10 per cent in 2019.
Inflation has spiralled since Egypt floated the pound in November 2016 as part of the economic reform programme qualifying it for a $12 billion financing deal with the IMF. It jumped to 35 per cent in July last year after cuts to energy subsidies for the second time in two years. The Central Bank of Egypt (CBE) has tried to slow the inflation by raising interest rates by seven points since November 2016. While the higher interest rates have helped attract about $19 billion in purchases of treasury bills, they have also increased the cost of borrowing by the private sector.
According to investment firm Prime Securities, the stabilisation of the prices of most of the components of the goods and services basket used to calculate inflation, together with the CBE's decision to increase the ratio of deposits commercial banks have to keep with the CBE from 10 to 14 per cent of their overall deposits, explains the drop in inflation. The CBE had also decided not to use interest rates as the only tool to absorb inflation, it said.
It expects the CBE to adopt an expansionary monetary policy based on lower interest rates to encourage investment and contain the budget deficit in the current quarter to achieve a projected growth rate of 4.5 per cent. This would help trim local debt payments and help tighten the budget deficit, Prime Securities said.
Economists also expect the CBE to start cutting rates in the coming months, with London-based Capital Economics expecting them to drop to 13.25 per cent from the current 18.75 per cent by year's end. The CBE Monetary Policy Committee, responsible for deciding interest rates, holds its next meeting on 15 February.

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