Gradual inflation ease to single digit in 2019: Analysts

CAIRO – 11 August 2017: Decades-high annual headline inflation will start to ease over the coming months more quickly than expected, London-based research agency Capital Economics said Thursday.

Inflation will fall below 20 percent around the turn of this year, to keep falling to 11 percent by the end of 2018 until it reaches a single digit in 2019, the research note predicted.

Egypt's annual urban consumer price inflation hiked in July to 33 percent from 29.8 percent in June. Meanwhile the annual inflation rate rose to 34.2 percent in comparison with July 2016, the official Central Agency for Public Mobilization and Statistics (CAPMAS) said Thursday.

July’s inflation rate represented a peak, which will gradually fall as impact of economic reform measures will fade, Capital Economics’ Middle East economist Jason Tuvey said in the research note.

Drivers of the inflation surge were listed as the pound’s devaluation, subsidy cuts and indirect taxes, Tuvey said.

Local research firm Pharos Holding agreed with the reasons behind the 33 percent inflation rate in July.

“Inflationary pressures have been spotted across all the Consumer Price Index sub-items, but the major contribution to July’s monthly inflation rate acceleration was attributed to the non-food items,” Pharos economist Ramy Oraby said.

Oraby expects, as well, the monthly inflation pace to decelerate going forward.
Pharos kept their projection that the average headline inflation rate would register 33 year-on-year for the first quarter of fiscal year 2017/18 as a whole.

Over the next few months, inflation will still be impacted by the VAT.

According to Capital Economics estimates, the impact of subsidy cuts is likely to fall by about 1.5 percent in November of this year when the first wave of the fuel price hike was imposed in 2016 on the same day of the flotation.

Fading impact of the pound’s flotation will reduce inflation rate by 10 percent by early 2018, also the contribution of the economic reform measures will push inflation down by 3-4 percent, as per Tuvey forecasts.

This expected decline should allow the Central Bank of Egypt (CBE) to ease its monetary policy and lower the benchmark overnight deposit by 100 basis points (1 percent) to 17.75 percent at the Monetary Policy Committee (MPC) meeting in December of this year, according to Tuvey.

Capital Economics expect the policy rate to drop to 12.75 percent by 2018-end and 10.50 percent by 2019-end.

Skyrocketing inflation level came after it was single digit in early 2016, forcing the CBE to adopt a “more aggressive” monetary tightening cycle than many analysts expected.

The benchmark overnight deposit rate was increased by a cumulative 400 basis points in May and July, to 18.75 percent.

When inflation falls, the CBE’s monetary policy will be eased, according to Tuvey.