Macro Analysis /

Egypt: July inflation decelerates; interest rates to remain unchanged

  • July inflation slowed down reflecting a sharp drop in Food & Beverages prices despite multiple inflationary pressures.

  • Annual inflation driven by its heaviest constituents Food, Utilities, and Healthcare.

  • Inflation to remain below 6.5% during 2H2020; Interest rates to remain unchanged

Al Ahly Pharos Securities Brokerage
10 August 2020

Annual inflation decelerates, as Food & Beverage prices decline, despite hike in Utilities prices

July inflation slowed down to 4.6% YoY and 0.2% MoM, compared to 6.0% YoY and -0.1% MoM in June 2020. The deceleration reflects a sharp drop in Food & Beverages prices both monthly and annually: mainly the prices of heavy weight food items such as Fruits falling 3.7% MoM, Vegetables falling 1.8% MoM, and Meat & Poultry and Seafood both falling 2.3% MoM. On the other hand, inflationary pressures from multiple factors were significant in July, but were fortunately not enough to offset the downward pressure made by Food items, the heaviest category of the CPI basket.

Inflationary pressures were caused by the following factors. First, there was an unfavorable base effect where inflation had almost halved starting June 2019 and entered the single digit zone. Second, electricity prices were raised to an average of 13%, and the hike was to be applicable starting July (input year), hence the 3.1% MoM price growth in Utilities, which was the highest monthly hike since July 2019, as electricity, gas, and other fuel prices grew by 11.2% MoM in July (input year). Third, the Restaurants & Hotels category saw a 1.2% MoM growth, which is largly linked to the sector’s recent return to operations.

The highest growing category on a monthly basis was Utilities, rising 3.1% MoM, while it usually remains stable unless electricity or fuel prices are increased at the beginning of every fiscal year. The hike in electricity prices represents the government’s ongoing plan to slowly phase out energy subsidies and re-prioritize its spending on more vulnerable segments of the economy. Additionally, a new development tax on tobacco came into action as of July 2020; however, given that Tobacco prices only grew by 0.5% MoM, the magnitude of the tax was minimal.

The second highest category was Restaurants & Hotels, growing 1.2% MoM as the price of accommodation services rose by 2.7% MoM in July reflecting the sector’s return to operation after being shut down by travel bans for almost 6 months now. 

Annual inflation driven by Food, Utilities, and Healthcare

Both on an annual and monthly basis, the contribution of all 11 non-food categories as a bulk to July’s inflation offset the contribution of the Food & Beverages category on its own. For 7 months now inflation reading has been less and less impacted by food items and more by the broad group of non-food categories, since the fruit and beverages volatility has been tamed relative to 2018 and 2019 fluctuations. However, Food & Beverages remains the category to mainly drive inflation, given its weight of 35% compared to that of any single non-food category such as Utilities or Heath (18% and 9%, respectively).

Inflation to remain below 6.5% during 2H2020; accelerating in November and December

We expect inflation to stabilize at 4.6% YoY in August. Inflation should then fluctuate within 5.0-5.5% YoY during 3Q2020 while rising slightly to 6-6.5% in November and December 2020 given the base effect where the record-low inflation levels in 4Q2019 provide an unfavorable base effect especially for the last 2 months.

The CBE previously slashed interest rates by 300 bps in an emergency meeting in early March, as an attempt to protect the economy from the Coronavirus global blowout, preserve growth, and prevent rising unemployment or weakening economic activity. As the situation persists, we expect the CBE to maintain interest rates to assess the impact of the cut and the stimulus packages, before deciding whether more cuts are needed.