Egypt inflation accelerates in July

Egyptian CPI inflation accelerated to 5.4% y/y in July, compared to 4.9% the previous month. This was a more rapid rise than seen in June as m/m acceleration rose to 0.9%, from 0.2% previously. Indeed, this was the fastest pace of price growth since December, and chimes with what we have seen in PMI surveys and the most recent MPC statement last week. The acceleration in inflation has reaffirmed our belief that the Central Bank of Egypt’s rate-cutting cycle has now ended, with the likelihood being that interest rates will be kept on hold at 8.25% for the overnight deposit rate for some time.

Real interest rate remains wide by historical standards

Source: Bloomberg, Emirates NBD Research

In the communiqué from the August meeting, the MPC highlighted that ‘annual inflation readings are expected to continue to be affected by unfavourable base effects in the near term’, and this has proven to be the case with the July print. Food & beverages inflation rose by 4.8% y/y in July, compared to 3.4% in June and 1.7% in May. As the largest component of the CPI basket, food has a particular bearing on the headline figure and upwards pressure will remain to the fore over the coming months as the government has outlined plans to slash bread subsidies. The rise in global food prices is putting the government under greater pressure to modernize its subsidy payments, just as it did with fuel subsidies last year. On a related note, the higher oil price (albeit fallen back somewhat from its recent peak since the start of August) will also exert further pressure in the near term.

The global and domestic price pressures have been evident in recent PMI surveys for Egypt. While purchase prices accelerated at the slowest pace since March in July, the sub-index remained strongly positive, with firms reporting higher prices for raw materials, shipping and fuel. Wage growth has also been positive for five consecutive months now, and these pressures have been passed on to consumers as output prices have also been consistently above the neutral 50 level all year. Again, though, this has been slowing in the most recent PMI surveys, and we believe that the upside for inflation is relatively limited from here. Having averaged 4.6% over the first seven months of the year, we forecast an average of 5.1% over 2021 as a whole, rising to 6.0% in 2022.

This inflation rate remains well within the central bank’s target range of 7% (± 2pp), and we do not expect the CBE to hike in response to this quickening price growth as it looks to support the economic recovery from the pandemic crisis and help keep government debt servicing costs down. At the same time, we do not expect any further cuts from the bank, with the last reduction in interest rates enacted in November. While Egypt’s real interest rate remains substantial at 2.85% (especially when compared to peers such as Turkey where the real interest rate has fallen to just five basis points), we expect that the CBE will err on the side of caution and look to maintain its attractiveness to foreign portfolio investors – especially while FX inflows from the tourism sector are undergoing a protracted recovery. Foreign ownership of Egyptian local debt stood at USD 22.3bn in May, a new record high, but with tapering from the Fed looking ever more imminent, this could come under pressure.