Macro Analysis /

Egypt: March inflation below expectations; rate cut on 29 April unlikely

  • Inflation uptick triggered by Food items. The softest pre-Ramadan price hike in years

  • Expect muted inflation levels in 2Q2021 before picking up in 2H2021, always below the CBE inflation target

  • Rate cut unlikely on April 29th in light of high yields for US treasury, despite high real interest rates.

Al Ahly Pharos Securities Brokerage
11 April 2021

Key Messages:

Inflation uptick triggered by Food items

March’s inflation for total Egypt declined to 4.8% from 4.9% annually in February and inflation for urban Egypt stabilized for the second month at 4.5% annually. The surge comes as Food & Beverages see their prices increase by 1.9% YoY, offsetting the 0.8% price decline in Clothing & Footwear.

Food accounts for almost all of March’s monthly inflation contribution, but not on annual figures

Fruits & Vegetables’ contribution to total annual inflation started to appear again during 1Q2021, after having almost disappeared in 2H2020. The share of Food in annual inflation remains on a downward trend, leaving the way for non-food items. Annually, March’s 4.8% inflation level was mostly driven by Education. While on a monthly basis, most of inflation was brought in by Food & Beverages.

Stable Core Inflation, representative of actual economic conditions

Core inflation slightly increased to 3.7% YoY as urban headline inflation stabilized at 4.5% in February and March. As the inflationary pressure of regulated items and the deflationary pressure of fruits & vegetables’ volatility are both taken out of the equation, a stable inflation level of roughly 3.7% better represents market dynamics since September 2020.

Expect muted inflation levels in 2Q2021 before picking up in 2H2021

As inflation came below our forecasts this month, it emphasized the CBE’s efforts towards inflation anchoring on the medium-term. We see inflation fluctuating just below 4.0% in 2Q2021 before rising to 5.0 -6.0% YoY during the second half of the year. Therefore, ending FY20/21 at an average of 4.5% and CY2021 at an average of 4.3%, staying well below the CBE target of 7% (-/+ 2%).

Rate cut unlikely on April 29th in light of high yields for US treasury

With all the tumult in US treasuries and the possibility of taper tantrum leading to significant retraction of funds from EM debt and equity markets, in addition to CBE’s attention to long term inflation anchoring rather than just inconsistent drops, we see more reasons for CBE to make no interest rate cuts on April 29th and keep any potential cuts to later this year. 

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