Egypt Inflation Hits Four-Year Low, Raising Chances of Rate Cut

Egypt’s annual inflation rate hit its lowest in four years, bucking expectations that cuts in fuel subsidies would spur an acceleration and raising the chances of the central bank joining a global easing cycle.

Consumer prices in urban parts of Egypt increased by 8.7% in July, compared

to 9.4% the month before, the state-run statistics agency CAPMAS said Thursday. That may give the central bank breathing space to make its first rate cut in six months when it meets Aug. 22. The benchmark rate is currently 15.75%, helping power the world’s best carry trade for foreign investors.

“The way things stand right now, I see there’s enough room to cut rates by 300 basis points over the course of a few months,” said Allen Sandeep, director of research at Cairo-based Naeem Holdings. Real interest rates of about 7.5% are about three to four percentage points higher than most emerging markets right now, he said.

The headline inflation figure -- the lowest since August 2015, according to data compiled by Bloomberg -- offers some welcome news as the country wraps up a three-year economic reform program backed by the International Monetary Fund. Fuel-subsidy cuts that went into effect at the start of the fiscal year in July had led many to predict a temporary uptick.

Sandeep said food prices hadn’t risen as much as expected, while consumer demand was muted.

“The government has been largely successful in terms of bulking up inventory to confront the expected impact,” he said, predicting the subsidy cuts probably wouldn’t spill over into August’s inflation figures.

The month-on-month rate accelerated to 1.8%, from a 0.8% contraction in June. The central bank is due to release the core inflation figure later Thursday.

Sweeping Reforms

The Arab world’s most populous nation has been on a mission to bring inflation under control after its late-2016 decision to float the currency and implement sweeping reforms, including cutting costly energy subsidies, to curb the budget deficit.

Figures released in late July showed the pressures ordinary Egyptians have been under, with about 32.5% of the population living in poverty in 2018, up from 27.8% in 2015 and almost double the rate at the start of the millennium.

The easing in inflation “increases the chances of a rate cut” this month, but the central bank might be cautious and wait for August figures before acting, said Mohamed Abu Basha, director of macroeconomic analysis at Cairo-based investment bank EFG Hermes.

• Bloomberg