A recent report issued by Capital Economics said that Egypt's inflation is expected to fall close to single digits by the end of this year, which should pave the way for interest rates to be cut further to 13.75%. "A further sharp drop in Egyptian inflation in December means that the central bank is likely to embark on an easing cycle at the next monetary policy meeting in February. We expect inflation and interest rates to fall further than most anticipate over the next couple of years," the report added. Headline inflation—which covers urban consumers only—declined from 26.0% year-over-year (y-o-y) in November to 21.9% y-o-y in December. Inflation has now fallen for five consecutive months since peaking at a 30-year high of 33% y-o-y in July. December's reading was the lowest rate of inflation since November 2016. The drop in inflation was driven by the waning impact of the devaluation of the pound, hikes in administered prices, and the introduction of a value added tax, all of which came in November 2016. After the central bank moved to a floating exchange rate, the currency fell by 50% against the dollar, which pushed up import costs. But these effects are now falling out of the annual comparison. The report added that the breakdown showed that the drop in inflation was broad-based. Inflation in all twelve of the major price categories was either unchanged or fell last month. Food prices—which account for 40% of the consumer price index (CPI) basket and tend to be heavily influenced by exchange rate effects—rose by 25.2% y-o-y, compared with 32.3% y-o-y in November. This alone knocked 2.8% off the headline rate. Despite the recent sharp falls in inflation, the Central Bank of Egypt's Monetary Policy Committee (MPC) kept its benchmark overnight deposit rate unchanged at its last meeting in December. But the headline rate is now more than 11% below its peak and is set to fall further over the coming months. Real interest rates—which the MPC has placed growing emphasis on—have risen sharply. "Accordingly, we think that the MPC will embark on an easing cycle when it next meets in mid-February. We have pencilled in a 100 base points cut in the overnight deposit rate to 17.75%," the report said.
