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Sharp decline in inflation sets up rate cut for next week: Capital Economics

Thu, Feb. 8, 2018
CAIRO – 8 February 2018: Capital Economics maintained its long-held view that Egypt’s inflation and interest rates will fall further than most expected, according to Thursday’s report.

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Egypt’s annual inflation declined to 17 percent in January 2018, the Central Agency for Public Mobilization and Statistics (CAPMAS) stated on Thursday.

The report added that the continued sharp decline in Egypt’s inflation in January paves the way for the central bank to embark on an easing cycle at its monetary policy meeting next week.

“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 report affirmed.


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The report clarified that the Egyptian pound floatation pushed up the cost of imported goods but these effects are now falling annually.

Capital Economics expected a 100 BP cut to the overnight deposit rate to 17.75 percent, adding that there is a risk that the monetary policy committee (MPC) will cut rates by more than this.

It also anticipated that inflation and interest rates would fall further than most expected.

“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 percent ± 3 percent for end of 2018,” the report noted.

It clarified that meeting MPC’s target should pave the way for the overnight deposit rate to be cut to 13.75 percent by the end of this year, whereas the consensus expects it to fall to 14.5 percent.

On Tuesday, Capital Economics estimated that the increase in gas production in Egypt will translate into a 2.8 percent increase in the real gross domestic product (GDP) over the next three years.


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