EFG-Hermes said in a report on Thursday Egypt’s headline consumer price inflation eased slightly in August to 9.8% Y-o-Y from 10.3% Y-o-Y in July on deceleration in annual food price inflation, in line with its expectation of 9.7%. Meanwhile, non-food inflation decelerated slightly to 7.2% Y-o-Y from 7.4% in July. On a monthly basis, food prices rose 1.6% M-o-M in August for the third consecutive month, largely reflecting seasonal price increases associated with Ramadan.
“We maintain our 2013 average inflation forecast of 9.3% Y-o-Y, taking into account a likely pick-up in 4Q2013 inflation due to unfavorable base effects,” Hermes stated.
It expected the Central Bank of Egypt (CBE) to reduce interest rates by another 50 basis points (bps) in its next meeting on 19 September.
“We were weighing the probability of another rate cut following the move in August and since CBE rhetoric and bond market movements lead us to anticipate further easing of monetary policy. Inflation dynamics were favorable, as we had expected, and we expect further disinflation starting January 2014; 4Q2013 is likely to register acceleration due to unfavorable base effects. In general, we foresee 50-100 bps further reduction in the remainder of 2013 from August levels, including a potential cut in September,” according to the report issuer.
The investment bank also indicated that the potential policy rate cut is likely to provide another leg for an ongoing local bond market rally.
Yields on T-bills have fallen by c270 bps on average, while those of bonds fell close to a three-year low since 30 June, defying global emerging market trends as they benefit from reduced macro risks, thanks to the GCC support package to Egypt of USD12 billion. The latter improved the inflation outlook and prompted the CBE to reduce policy rates in August.
“We expect further favorable dynamics to continue as inflation remains subdued and as the CBE further reduces policy rates, in view of its attempts to stimulate growth and reduce the burden on the fiscal budget’s interest expense,” Hermes said.