CBE - File photo
CAIRO – 22 August 2017: Egypt’s absorption growth rate increased from an average of 4.5 percent before November of the fiscal year of 2015/2016 to 6.3 percent in the first half of 2016/2017, Pharos Holding said in a Sunday report.
The significant rise in the absorption growth rate was due to more intensified economic pressures and/or anticipation of a severe economic reform measures.
The report highlighted that although the absorption rate decreased to 3.65 percent in the third quarter of FY 2016/17, after the devaluation of the Egyptian pound and the energy cuts in the second quarter of the same fiscal year, this was not enough to ease the inflationary pressure.
Despite decelerating, the average monthly inflation rate recorded 2.9 percent in Q3 of 2016/17, up from an average of 1.1 percent in 2015/16, which is explained by the absorption level (demand forces) as the Egyptian economic agents traditionally tend to spend more in order to hedge high inflation expectations, Pharos said.
Therefore, the CBE initiated two consecutive rounds of interest rate hikes, in addition to another round of the energy subsidy cuts by the Ministry of Finance.
The Central Bank of Egypt (CBE) has introduced two rounds of interest rate hikes, followed by another energy subsidy cut.
In July, the CBE unexpectedly decided to raise interest rates by 200 basis points (two percent), following late June’s fuel price hikes and followed by the electricity price increase.
Pharos estimated the real absorption growth rate to drop significantly in the first quarter of 2017/18, adding that its Financial Conditions Index (FCI) forecasts a significant slowdown in tandem with the recently applied tight monetary and fiscal policy measures.
The investment bank estimated the monthly inflation pace to ease in the coming months, steering the annual inflation rate downwards after recording 33 percent in July, supported by the waning supply shock, in addition to the aforementioned domestic demand deceleration.
Pharos maintains its expectations that the CBE would start its monetary easing no earlier than its earlier estimates the end of 2017, but a quicker than previously expected policy loosening is consistent with balancing the risks to both the economic growth and the inflation outlook.
“The magnitude of the monthly inflation pace in August is key to either confirm or deny our conclusion. While a supportive monthly disinflation pace would support a rate cut, the opposite case could initiate further tightening,” Pharos.