The recent trend of different price indicators showed that the inflationary shock that followed the implementation of economic reform measures, mainly the exchange rate liberalisation and the fuel price hike in November 2016, seems to be cooling off, according to Pharos Holding’s report from Thursday.
Pharos said that the headline consumer price index change decelerated from 4.8% month-on-month in November to 1.7% in April.
Moreover, the monthly core Consumer Price Index (CPI), which measures the underlying inflationary pressure by excluding both the most-volatile and regulated items, decelerated from 5.3% in November to 1.1% in April.
The report added that the producer price index (excluding mining and quarrying activity), which measures prices at the factory gate, decelerated from 6.9% in November to 1.9% in April.
“As a measure of companies’ pricing power, the Producer Price Index (PPI) showed that companies across the economy did pass the extra cost to the end-users instead of tightening their margins,” the report read. “Pharos’s preliminary Financial Conditions Index reading suggests that monetary conditions remain reasonably tight across the economy”.
The aforementioned data indicates that the CBE’s Monetary Policy Committee (MPC) will keep the interest rate unchanged at the next policy meeting on 21 May.
Pharos noted that the recent uptick in the monthly core-CPI and PPI reflects seasonal effects ahead of the holy month of Ramadan.
It added that the timing of the next fuel price hike would be crucial in deciding on the interest rate reaction. If the government could manage to undertake the next fuel price hike after November 2017, the inflation rate will be on a notable downward trend.
Pharos expected that foreign reserve interest rate hikes in June may add some pressure on the exchange rate. Furthermore, the MPC will not be obliged to mirror the foreign reserve rate hike automatically, unlike the GCC economies.
Finally, it says that the second IMF tranche disbursement would represent a confidence booster that would help ease potential pressure on the exchange rate.