Egypt's lowest inflation in 6 years opens door for more rate cuts

Egypt remains attractive to foreign investors seeking ample returns from pumping money into short-term debt.

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    Consumer prices in urban parts of Egypt rose by 7.5 percent, according to the state-run CAPMAS statistics agency [File: Hayam Adel/Reuters]
    Consumer prices in urban parts of Egypt rose by 7.5 percent, according to the state-run CAPMAS statistics agency [File: Hayam Adel/Reuters]

    Egypt's annual inflation eased in August to its lowest level since the start of 2013, paving the way for a new round of interest-rate cuts when the central bank meets later this month. 

    Consumer prices in urban parts of Egypt rose by 7.5% the state-run CAPMAS statistics agency said Tuesday. Prices rose 0.7% on the month compared with 1.8% in July.

    The central bank is due to release its core inflation figure, which strips out regulated and volatile items, later in the day.

    "It looks like you still have favorable base effects - so headline inflation is probably going down from last year and this is going to provide a favorable backdrop for the central bank to continue its easing cycle," said Jean-Michel Saliba, a London-based economist with Bank of America Merrill Lynch.

    The "trajectory is for inflation to continue coming down in the second half of the year and for the central bank to continue to use that as a window to ease rates," he said.

    Egypt's central bank cut its benchmark interest rate by 150 basis points when it met last month, arguing it was "consistent" with achieving its inflation target of 9%, plus or minus 3 percentage points, by the end of 2020.

    Egypt Graphic

    But the bank said that future decisions remain "a function of inflation expectations, rather than prevailing inflation rates."

    The slowdown in inflation is a key gain for the bank. Egypt had seen consumer prices surge by over 30% after the November 2016 decision to devalue the currency as a first step in a sweeping economic program that helped secure a $12bn International Monetary Fund loan. 

    The IMF's funding and support for the program helped revive investor interest in the Arab world's most populous nation, with billions of dollars from abroad being pumped into the local debt market as economic growth rebounded.

    Reham El Desoki, an independent economist in Cairo, said she expects further rate cuts of 100-200 basis points before the end of the year. 

    "Inflation is expected to continue to decline until December and January, when it is expected to rise due to the base effect," she said.

    Even with the latest rate cut, Egypt remains attractive to foreign investors seeking ample returns from pumping money into short-term debt. 

    The real interest rate is still strong compared to other emerging-market economies, said Saliba.

    In addition, "there seems to be some evidence that investors are also looking to extend duration," he said, referring to a growing appetite for bonds instead of Treasury bills.

    "That tells you that there is some positioning taking place in reaction to these cuts, as well as confidence in the general macro story in Egypt."

    SOURCE: Bloomberg