Further fall in inflation paves way for interest rates cut in Egypt: Capital Economics

Current data enough to convince MPC to ease policy at its next meeting

A further fall in Egypt's inflation is paving the way for interest rates cuts, as the Central Bank of Egypt's Monetary Policy Committee (MPC) is scheduled to meet this week, a recent research note issued by London-based consultancy Capital Economics suggested.
"The further sharp decline in Egyptian inflation in January, to 17.1% year-over-year, paves the way for the central bank to embark on an easing cycle at its monetary policy meeting this week. And further ahead, we maintain our long-held view that inflation and interest rates will fall further than most expect," the report noted.
The headline rate—which covers urban consumers only—went down from 21.9% y-o-y in December of last year and a peak of 33.0% y-o-y in July, reaching the lowest rate of inflation since October 2016.
The drop in inflation over the past six months has reflected the unwinding impact of the pound's steep devaluation, hikes in administered prices, and the introduction of a value added tax, all of which came in November 2016.
The currency dropped by 50% against the dollar after the authorities announced shifting to a floating exchange rate system, which pushed up the cost of imported goods. But these effects are now falling out of the annual comparison.
The breakdown of the data showed that the fall in inflation was broad-based. Inflation was either
unchanged or fell in all 12 of the major price categories.
Food inflation—which accounts for 40% of the consumer price index basket—dropped from 25.2% y-o-y in December to 16.9% y-o-y last month. This alone shaved 3.3% off the headline rate.
Earlier this week, Governor of the Central Bank of Egypt Tarek Amer said that the MPC would start to cut interest rates "soon."
"We think today's data will be enough to convince the MPC to ease policy at its meeting next week. We have pencilled in a 100 basis point cut to the overnight deposit rate, to 17.75%. If anything, there's a risk that the MPC decides to cut rates by more than this," the research note added.
The Capital Economics note continued, "further ahead, we have argued for some time that inflation and interest rates would fall further than most anticipate. We forecast the headline inflation rate to fall close to single digits over the next six to nine months, meaning that the MPC should easily meet its target of 13% ±3% for end-2018."
"This should pave the way for the overnight deposit rate to be cut to 13.75% by the end of this year, whereas the consensus expects it to fall to 14.50%," the note added.